Why short-term car loan tenures are a better choice?

Find out why short-term car loans are a better idea despite the high EMI involved.

Why short-term car loan tenures are a better choice

We all know that the interest cost of a loan increases with the duration of the loan. The longer the car loan tenure, the higher would be the total interest cost. This is because, due to the low EMI on a longer car loan, the reducing principal amount will remain outstanding for a longer period. Consequently, the interest charged per month would be higher. So, even if the maximum tenure for car loan may seem easy on the pocket, you will end up paying more by the end of the loan. 

Often, we may have to opt for a longer loan tenure if the EMI associated with a shorter tenure is too much for our monthly budget. Nevertheless, as a borrower, it is always recommended that you opt for a loan as short as you can manage. 

Here are some of the factors that justify the selection of a shorter tenure:

1. Higher interest component

To illustrate the increase in the interest cost with an increase in the tenure of a car loan, look at the below table, where the car loan is Rs 1 lakh and the rate of interest is 7%. 

Tenure of loan (in years) EMI (in INR) Total interest cost (in INR
1 8,653 3,832
2 4,477 7,454
3 3,088 11,158
4 2,395 14,942
5 1,980 18,807
6 1,705 22,753
7 1,509 26,779

As is evident from the table, the total interest cost you will be paying increases with every passing year. If you can afford a higher EMI, you should reduce the loan tenure and save this additional expense. With a good credit score, you may even get better loan interest rates against your car loan. But that shouldn’t be a deterrent in choosing a shorter tenure. 

Related: Is it smart to convert your investments into cash or take a loan?

2. Increased maintenance cost

The maintenance cost of a car increases with its age. If you continue a car loan for (say) 7 years, you will be owning the car far beyond its warranty period. However, if you have a shorter tenure, you can easily sell off the car if it is costing you too much on maintenance. Selling off a car during the loan period is possible, but there are additional steps involved.

3. Difficulty with resale

If you have a short-term auto loan, you can quickly pay off the EMIs and sell the car if you wish. However, if the tenure is longer and you want to sell the car during the loan period, the process may take time and effort. Do note that the RTO records and even your car’s registration certificate (RC) would mention the hypothecation. Before selling the car you will have to foreclose the loan and pay all outstanding dues. Then you have to obtain an NOC from your lending bank or financial institution, submit it to the RTO, and apply for a new RC that excludes the hypothecation. Only after these formalities can you sell the car.

Related: 5 Things to know about a used car loan

4. Problems with interstate transfer

People often face difficulty while transferring their car to another state if they have an active loan against the car. You will have to obtain an NOC from the lending bank and the existing RTO and also apply for re-registration in the new state. With a shorter loan tenure, you are likely to settle the car loan sooner and transfer your car without involving the bank, or even sell it easily before leaving the state. 

5. Temptation to exceed your budget

With a longer loan tenure, the EMI is significantly lower. The low EMI may tempt you to go for a higher car variant. This in turn would cost you more money in the long run, although the EMI may seem affordable. If you sense your capacity to pay a higher EMI, it is better to go for a shorter tenure rather than a costlier car.

6. Lower resale value

If you take a longer loan tenure and end up retaining the car throughout the loan period, the resale value of the car would be far lower. The resale value reduces with every passing year. The depreciated value of your car at the end of three years would be much higher than what it would be after seven years. 

Related: Checklist for Buying/Selling a second hand car

Last words

With the slashing of interest rates by the RBI, you can get a much more affordable car loan interest rate than a few years back. You can save money on the car loan interest further by applying for a shorter car loan tenure. Make sure that your dream car not only gives you a great driving experience but also saves you a decent amount of money. Look at these 6 Things to keep in mind before buying used cars.




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