What is the ideal car loan tenure?

Deciding on the right loan tenure can significantly impact your financial health and overall ownership experience when purchasing a car. The loan tenure is the length of time over which you agree to repay the borrowed amount. Choosing the ideal car loan tenure involves balancing monthly affordability with the total cost of the loan. Here’s a comprehensive guide to help you choose the best tenure for your car loan.

Your car loan tenure significantly affects your EMI (Equated Monthly Instalment) – the amount you pay each month towards repaying the loan. Opting for the maximum tenure available allows you to keep your EMI lower as the repayment period is extended. Conversely, choosing a shorter tenure will result in a higher EMI, as the loan is repaid over a shorter period.
You can see this in action using the HDFC Bank Car Loan EMI Calculator.

• On a ₹1 lakh loan at a 9% interest rate for a 24-month tenure, you would pay an EMI of ₹4568*.
• Increase the tenure to 48 months, and your EMI comes down to ₹2489*.

While a longer tenure helps you bring down the EMI, it increases the overall interest cost of your loan. So, to arrive at an ideal tenure for your car loan, you must figure out the EMI you can afford to pay every month.

Step 1: What is your monthly surplus?
Evaluate your monthly income and expenses. Determine how much you can comfortably pay each month without compromising your financial stability. Deduct the payments from your net income to determine the surplus you are left with each month. Also, reduce other outgoings – mutual fund SIPs, insurance premiums, EMIs on other loans etc.
Step 2: What are your future cash flows?
If you anticipate a salary increase soon, you might opt for a larger EMI now, as you'll have more financial flexibility later to manage these higher payments. Conversely, if you expect to make a significant purchase soon or want to save for other big expenses, choosing a lower EMI can help you save more each month, making it easier to manage your current budget and future expenditures.
Step 3: Do you plan to prepay?
One option is to choose the maximum tenure when you start and reduce the tenure by prepaying part of the loan. But check on prepayment charges with your bank. HDFC Bank offers car loans with zero foreclosure charges.
Step 4: How does depreciation impact?
Keep in mind that cars depreciate quickly. A longer loan tenure may mean you owe more on the vehicle than its current market value, especially if you decide to sell or trade in the vehicle before the loan term ends. Shorter tenures help mitigate this risk as you will have paid off more of the loan relative to the car's value.

Selecting the ideal car loan tenure involves balancing monthly affordability with the total cost of the loan. Short-term loans offer lower overall interest costs but come with higher monthly payments, while long-term loans provide lower monthly payments but result in higher total interest costs. Assess your budget, financial goals, and the impact of depreciation to choose the tenure that best suits your needs.
Looking to apply for a car loan? Click here.

* Terms & conditions apply. Loan disbursal at the sole discretion of HDFC Bank Ltd.