It is a significant decision to purchase a car. Many people prefer to buy second-hand cars because they are less expensive. Many financial institutions offer attractive terms and it is now common to get a loan. There are many things to consider when considering a used car loan in India. These include the interest rate, zero down payments, the amount offered, and, most importantly, the term of the loan. The length of the loan is usually between 5 and 7 years depending on the vehicle’s condition, mileage, and age.
It can be difficult to decide on the term of a used vehicle loan. You may be able reduce your monthly payments by taking out a longer term, but is this the best solution?
Tenure is important in Used Car Loan Financing
The monthly instalments will be lower if you choose a longer tenure. However, the total interest component will still be higher if you choose a shorter term. You will also be debt-free sooner if you choose a shorter tenure.
This example of a used car loan calculator may help you to understand it better.
- A loan of Rs5 Lakhs is taken at a 10% interest rate.
- Your term is 36 months. You will be paid:
- Monthly Instalment of Rs18.056
- The interest on the loan is Rs1,50,000
- Total amount Rs 6,50,016
- You can choose a tenure period of 48 months. You will be paid:
- Monthly instalment Rs14,583
- The interest rate on the loan is Rs 2,00,000.
- Total amount Rs 6,99,984
You can see that your monthly instalment is lower if you have 12 months left on your tenure. However, you end up paying Rs50,000 more for your car overall.
Factors to consider when choosing a loan tenure
As you can see, tenure has an impact on your monthly instalment, interest rate, and final amount. Each has its pros and cons. While the ideal tenure should be short, it depends on several other factors. Let’s see what these are.
Take into account your monthly disposable income
Your monthly expenses should be deducted from your net income. This is your disposable income or surplus. Your monthly expenses should include utility and grocery bills, premiums, loan instalments, investment installments (RDs, SIPPs, etc.). You can see the full list here. Also, you should have money set aside for emergency situations.
What are your likely future cash flows?
You may be eligible for a larger monthly instalment if you’re due for a promotion or raise, or if you have a better job that pays a higher salary. You might need a lower monthly payment if you have a large expense such as a home renovation or major appliance purchase.
Do you plan to pre-pay?
People choose to have the longest term and then prepay the remaining loan amount. This is a good option if you expect a large sum of money in the near future. It is important to verify if prepayment fees are imposed by your lender.
The value of a car is declining
The value of cars decreases each year and they are subject to wear and tear. Long-term loans can make you pay a lot more. It is worth considering whether the additional money is worth it. The car’s value will have diminished significantly by the time the loan is closed.
This will give you an idea of the length of time you should finance your used car. It doesn’t matter what, it’s always best to finance the vehicle for the shortest term possible. This allows you to save money and reduce your expenses for a few more years so you can pay off the loan quickly.
You will see many second-hand cars for sale with financing. It is important that you verify the credibility of the lender before you shop.
