When applying for a Car Loan, one crucial factor to consider is the loan tenure. The duration of your Car Loan directly impacts the EMI (Equated Monthly Instalment) you pay each month, and it also affects the overall cost of your car. Understanding this connection helps you make an informed decision and plan your finances effectively.
Connection between EMI and loan tenure
EMI is calculated using the following formula:
EMI = [P x R x (1+R)^N] / [(1+R)^N-1]
Where:
- P = Principal loan amount
- R = Monthly interest rate
- N = Loan tenure (in months)
The formula shows that loan tenure (N) directly impacts the EMI amount. A longer tenure results in lower EMIs, while a shorter tenure leads to higher EMIs.
Let’s understand the relationship between EMI and loan tenure with an example. Consider a Car Loan of ₹5,00,000 at an interest rate of 10% per annum.
| Loan Tenure | EMI Amount |
| 3 years (36 months) | ₹16,134 |
| 5 years (60 months) | ₹10,624 |
| 7 years (84 months) | ₹8,301 |
As evident from the table, longer tenures result in lower EMIs, making the loan more affordable on a monthly basis. However, it’s essential to note that longer tenures also mean paying more interest over the loan’s life. You must strike a balance between these two options as per your repayment ability.
EMI on short-term loans vs long-term loans
EMI on Car Loans with short duration
- Loans with a short duration require higher monthly instalments because the principal and the interest are to be recovered in a shorter period.
- Opting for a short-term loan results in lower overall interest paid in the long run.
- Choosing a short-term loan means you can repay your loan faster.
- This option is suitable for those with stable income and savings.
EMI on Car Loans with long duration
- Opting for a long-term loan results in lower monthly instalments.
- However, you end up paying a higher overall interest on long-term loans.
- This option provides an extended loan repayment period.
- It is suitable for those with a limited monthly budget for EMIs.
How to find the ideal Car Loan tenure to minimise EMI?
- Assess your monthly income and expenses to decide a comfortable EMI
- Use an online EMI Calculator to compare different tenure options
- Balance your preference for lower EMIs with the total interest payable
- Align the tenure with your long-term financial goals
Conclusion
The tenure you choose when you apply for a Car Loan online significantly affects your EMI. Assess your financial situation, use an EMI Calculator and select a tenure that aligns with your goals.
