What You Should Know About Loan Tenure When Financing a Used Car?

Everyone dreams of owning a four-wheeler but often postpones the purchase due to a lack of sufficient funds or affordability. In recent years, the pre-owned car market has expanded significantly. With organised players entering the space, buyers can now own their favourite car at up to 50% less, along with complete warranties.

The second-hand car market is also growing due to easy availability of second-hand car loans provided by financial institutions and NBFCs like Hero FinCorp. These loans offer ample loan amounts, competitive interest rates and flexible repayment tenures. While interest rates may not be flexible, you can always choose a loan tenure as per your repayment capability.

What is Loan Tenure in a Second Hand Car Loan?

Loan tenure refers to the duration provided by the lender to repay the loan. It is the period for which the borrower agrees to repay the lender. It can be from a few months to a few years, based on the lender's policy. The tenure decides how much amount will be paid monthly and how much total interest will be paid.

How Loan Tenure Influences EMI and Interest?

When you take a second-hand car loan, the interest and EMI vary based on the loan tenure. Here are a few scenarios:

• Short Tenure: Larger EMIs but less interest paid overall.
• Long Tenure: Smaller EMIs but more interest paid throughout the loan term.

For example, if a borrower takes a Rs 5 Lakh loan at 12.5% per annum interest rate:

• With a 1-year tenure, the EMI will be 44,541, but the total interest will 34,492.
• With a 5-year tenure, the EMI will be 11,249, but the total interest will 1,74,940.

Choosing the right tenure helps you keep your EMI affordable without overpaying in interest.

Impact of Loan Tenure on Used Car Loan Eligibility

Besides your income, credit report, and employment status, the loan tenure also influences your used car loan approval.

• Short Tenure: High and constant income will be required by the lenders due to the larger EMI.
• Long Tenure: Low-income earners can opt for this, but the lenders will scrutinize financial information harder.

For example, if a person applies for a second-hand car loan for a 5-year term, strong income evidence may be required. A borrower with a 2-year term can try to avoid more checks if they have the capability to pay the heavy EMI.

Factors to Consider While Selecting Loan Tenure

Selecting proper tenure is based on individual income and expenditure.

Monthly Income and Expenditure

Borrowers should check how much of their income can be set aside for EMI. If they can pay more each month, a shorter tenure is better. Those with other expenses may need a longer tenure.

Interest Rate

The interest rate impacts the total repayment. Borrowers should compare rates and check how tenure affects the cost of a second-hand car loan.

Car’s Age and Condition

Older vehicles might not be eligible for long tenures. Vehicles above 5 years can have a 2-3 year tenure cap, which influences Used Car Loan eligibility.

Future Financial Plans

If future income is anticipated to rise, selecting a short tenure can assist in repaying the loan within a short span. Individuals with fluctuating incomes might opt for a longer tenure for lower EMIs.

Short vs. Long Tenure: Which is Better?

The ideal loan tenure depends on your income and financial comfort.

Short Tenure (12-24 months):

• Ideal for individuals with a higher income.
• Leads to lower overall interest payments.
• Involves high EMI payments.

Long Tenure (36-60 months)

• Ideal for those who prefer lower EMIs.
• Increases the overall interest payable.
• Suitable for those with low monthly savings.

So, you should compare EMI and interest charges based on your income and other expenditures.

How to Use an EMI Calculator to Select Tenure?

An EMI calculator can be used to plan the repayment and choose an ideal tenure. Here's how to use an online EMI calculator:

• Enter the loan amount.
• Choose the tenure.
• Enter the rate of interest.

Once you enter these values, you will see the EMI amount, overall interest and total loan amount.

Mistakes That Should Not Be Made in Selecting Loan Tenure

By avoiding simple mistakes, you can save money.

• Selecting the Longest Tenure Without Calculating Total Cost: Many borrowers choose a longer tenure to lower EMI and end up paying more overall interest.
• Picking a Short Tenure Without Verifying Monthly Budget: Many borrowers choose a shorter tenure that leads to a higher EMI which may affect their monthly budget.
• Overlooking Interest Charges: This can lead to more amount interest payable during the loan term.

How Car Loan Tenure Influences the Total Expense of a Vehicle?

Long-term repayment can make vehicle ownership more expensive. Loan tenure not only affects EMI but also the total expense of car ownership. For instance, if you take a second-hand car loan of Rs 3 Lakh for 5 years, you may end up paying more than Rs 1 Lakh total interest, if the rate of interest is 12.5% per annum.

Balancing EMI and Interest for the Right Tenure

Selecting a tenure that strikes a balance between EMI and interest maintains finances in good condition. A 3-4 year tenure generally provides a good balance for most borrowers. Computing the EMI through an online calculator and learning used car loan eligibility in advance can help you choose a tenure while making an application.

How can you Choose the Right Tenure?

Planning in advance will help in smooth repayments.

• Borrowers must verify EMI and interest for varying tenures prior to making a decision.
• An affordable EMI avoids financial burden throughout the repayment term.
• Check eligibility for a second-hand car loan in advance to avoid rejection.

Conclusion

Opting for an appropriate tenure of a second-hand car loan helps manage monthly instalments without paying excess interest. Shorter tenures result in increased EMIs but save on overall payable interest. Long tenures lower EMIs but raise the total cost. You must verify your income and expenses and use EMI calculators to select the optimal repayment term. This prevents financial strain while managing the loan.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.