Car Loans – Lower EMI’s or Shorter Tenures

In today’s world where time is equated with money, owning a vehicle has become a necessity. Also adding to the need is the lack of proper mass-transportation facilities especially in the Indian metros. Buying a car is once-in-a-lifetime affair for many of us and that is why taking a car loan seems to be the most viable option.

When it comes to car loan, a major question that haunts every applicant is if he should try to lower the car loan EMI or shorten the tenure. Like every other problem, this too has two sides. Let us carefully evaluate the advantages and disadvantages of lower EMI’s and shorter tenures.

The Inverse Relationship between EMI and Tenure

Equated Monthly Instalments or EMI is the monthly payment that we make towards the loan that includes contribution towards both principal and interest on the loan amount. EMI is calculated based on the loan amount, tenure and the interest rate. In case of fixed interest rates, EMI payments remain same over the tenure. EMI payments vary when the base rate changes in case of floating interest rates.

Tenure and EMI is inversely proportional in a sense that if you want to lower the EMI’s, you should increase the tenure.

Why Shorter Tenure is the Best Option When it comes to Car Loans?

One important fact that every applicant must be clear with is that a car is a depreciating asset. Depreciation is the difference between a car’s value when you buy it and when you later sell it. This is one of the primary reasons as to why you should go with shorter terms. Here’s a list of other reasons why we advocate for shorter tenures.

●        When you choose to pay your car loan over a short term, you will make huge savings on interest. Also, the interest rates applicable for shorter tenure loans are lower when compared to long term loans.

●        If you are in the prime of your career and still have years left before retirement, opting for long term car loan makes sense. But from the perspective of financial savings, it is wise to opt for a short term because it will allow you to save before retirement.

●        If you have opted for a car loan with floating interest rates, then choosing a shorter tenure would be the right decision to make. After all, who knows how many times the interest rate cycles will turn over the tenure?

●        Unlike assets like land and home, a car’s resale value will only decrease over the year. It is better that you close the loan as early as possible – even when the car model is still popular in market.

Points to Ponder

Short term loans may reduce the overall interest you pay. But, if that means you will have to make a lot of lifestyle compromises, then think twice about it! Defaulting on your car loan EMI can have a lot of repercussions. You should be able to comfortably pay your EMIs and also have sufficient money for other emergency needs. It will be hard for you to avail another loan if you default on EMI because the CIBIL credit rating comes down.

In conclusion, it should be understood that car loans are different from loans given for other appreciating assets. Depending on your financial priorities and goals for future, the EMI and loan tenure should be carefully decided.