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The desire for owning a car is gradually growing in India, according to TechSci Research (https://bit.ly/3OT1o5A). The Indian car loan market is poised for a “compounded annual growth rate (CAGR) of over 8 per cent in value terms and will reach USD60 billion by FY2026." A shift from combustion engine vehicles to electric vehicles seems to be the trend.

With the car loan benefits for both types of car loans, more people can be proud owners of new cars or preowned cars. Though car loans are easily available from banks and private Fintech lenders, borrowers need to focus on loans that fit their budget. It is easy to go overboard with loans that are beyond your capacity putting you under undue financial stress and defaults.

Before applying for loans , use an EMI Calculator to determine the loan amount you can pay comfortably, the interest rate offered by the lender and the loan tenure.

These are the most important parameters that must be given special attention. The EMI calculator helps you get the correct estimate for the tenure allowing loan repayment comfortably. You can plan a pay-off without disturbing your regular monthly expenses. Car loan tenure from most banks typically ranges from 1-7 years. The shorter the loan tenure, the higher will be the EMI. In minimum tenure for car loan, you get a faster chance to pay off debt early. The maximum tenure for a car loan keeps you in debt longer, however, the EMIs will be less, with overall higher interest.

The car loan tenure influences the EMI (Equated Monthly Instalment)

The maximum tenure for car loans increases the interest outgo

Lenders levy higher interest rates on long-tenure loans compensating additional credit risks taken by them

Minimum tenure for a car loan increases the monthly EMI but allows you to go debt-free faster

For example: Let us understand this better.

Using the Bank of Baroda Car Loan EMI Calculator as an example will help.

When choosing a car loan for ₹10 lakhs for 36 months at a rate of interest of 8% you will pay ₹31,336.

Increase the tenure to 60 months, the EMI decreases to ₹20,276

The longer tenure is bringing down the EMI, but the interest cost is being added to the loan. A smart borrower, therefore, checks the best term suitable to them.

When budgeting your monthly expenses, if you are planning to repay loans, tight management works to your advantage.

Try to take out a monthly surplus from regular expenses. Clamp the outgoing, where there is an option. Investments side by side with the loan can get tricky. So, you need to balance both, while controlling the monthly budget.

Your income has a lot to do with your EMI payback capacity. If you are expecting a promotion with financial gains, that could affect your payment tenure.

If one of your investments is maturing, the surplus you can set aside to make a pre-payment. That will lessen the loan repayment tenure and decrease the burden from your EMI.

Car loans offer an option to repay over several timelines. You could choose a minimum timeline or a maximum tenure to pay off. Longer car loan repayment terms come with a set of pros and cons.

a) Lower monthly expense

Your monthly payment of EMI is low adding less stress on the monthly expenses. The EMI tenure is dependent on the monthly income of an individual. A person seeking a car loan can have several monthly payment obligations like household expenses. Paying higher EMIs can be an added stress.

b) Banks offer repayment flexibility

If a borrower selects longer repayment terms, it does not mean that they cannot pre-pay the loan or foreclose minimising the loan tenure. However, this is not as easy as it sounds. The individual must have enough extra funds for car loan pre-payment or enough funds for foreclosure. Both pre-payment and foreclosures are charged by most banks. Losing on the interest rate, banks try to compensate for lost interest with a penalty.

c) Less monthly burden

If EMIs are low, the monthly expenses can be adjusted accordingly. The extra cash that you set aside from your income can be invested in mutual funds or alternative investments .

a. Added interest charges over time

By stretching the loan tenure to 5 years instead of 3, the loan interest compounds. Using the earlier example, where the loan principal amount is ₹10 lakhs at 8% If you pay it off over three years, you will pay a total interest of ₹1,28,109. But if you pay it off over five years, your total interest cost will increase to ₹2,16,583. Your longer repayment term makes your loan almost ₹88,474 more expensive.

b. Longer periods of debt

Maximum loan tenure stretches the loan period which means that it takes more time for you to be debt free and apply for a fresh loan. Longer term increase CIBIL score for car loan , making it possible for you to get another loan unless your loan repayment has defaulted.

Minimum tenure for car loan could be anything between 1-3 years. Short-term repayment depends on the financial capacity of the borrower. Being able to pay high EMIs demands high income and if it is difficult, the borrower must never regard this option. If they can, it would mean high monthly EMIs till the loan tenure with high-interest rates. Let us go through the pros and cons of short-term loan tenure.

Short-term repayment entails a huge degree of pressure on the borrower. Repayment without a single default is not easy. In case the borrower is not able to meet the payment timely they incur a penalty that further burdens the EMI, upsetting the monthly budgeting.

In the short term, lenders add maximum interest on the car loan. For example, on a loan amount of ₹10,00,000, with repayment tenure set for 24 months at 8% interest, the monthly EMI is ₹45,227 and the total interest will be ₹85,454.

Though the EMI figure is frightening for those not earning enough, for those who can, it allows them to go debt free faster, giving them greater freedom. After the car loan is repaid, they can apply for another loan or go for an investment.

Some lenders attach discounts on early repayment for those paying back faster and can make car loans available at reduced interest rates. However, this solely depends on the lender and those offering the same may have more clauses in the fine print. Carefully read the terms and conditions.

The financial risk in short-term car loans is huge. Unless you are completely sure of the repayment capacity avoid this option. It is better to go for long-term loan repayment and make pre-payments from time to time. If the opportunity of disposable surplus cash arises you can also make a foreclosure. However, if you are unable to repay the short-term loan in the scheduled period, your debts keep adding to every missed payment.

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