A loan is a commitment and the equated monthly installments need to be paid on time. As a thumb rule, your total equated monthly installments (EMIs) should never exceed 35-40 per cent of your salary. In case you already have a home loan, this would mean that you need to choose a car loan wisely so as not to strain your finances.
If You Are Facing A Temporary Crunch
“Ideally, such situations should be avoided by planning loans that fit comfortably within your monthly cash flow. It's also wise to maintain an emergency corpus equivalent to six months of your expenses, including EMIs, to cover unforeseen financial challenges,” says Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, a loan distributor. For example, in case of a job loss, it may take several months to get a new job and in such situations, an emergency fund can come to the rescue.
However, if you're falling behind on your car loan payments, it's crucial to act swiftly to avoid penalties, a negative impact on your credit score, and the risk of repossession.
If your cash shortage is temporary, for just a month or two, consider borrowing from family, friends, or your employer, or redeeming investments like mutual funds to cover the shortfall. “One can also avail a personal loan to get funds, but it is best avoidable as the interest cost is very high on a personal loan and the overall installment amount increases substantially,” says Gaurav Goel, entrepreneur and Sebi registered investment advisor.
When The Financial Challenge Is Long-Term
For longer-term financial challenges, it’s better to find a sustainable solution. “Contact your lender to discuss your situation—many lenders offer options such as deferment, modified payment plans, or temporary forbearance. Refinancing your loan at a lower interest rate or extending the loan term can also reduce your monthly payments,” says Kapoor.
If your financial situation becomes unsustainable and it does not improve, you may need to consider selling the car or trading it in for a more affordable vehicle. Use the proceeds to pay off the loan or reduce your monthly payments. Remember, if you have a home loan, that should get priority over a car loan.
In case of financial stress, one needs to stay calm and make the decision that is best for them.
