How Long Can You Finance a Used Car?

Buying a car is a major decision, as it involves a big sum of money; many people today prefer to buy second hand cars as they are cheaper. It has become common to avail a loan for this, as numerous financial institutions offer loans at attractive terms. If, like countless others, you too want to make life easy with a used car loan in India, there are certain things you need to consider – like the rate of interest being levied, used cars with zero down payment, the amount of loan being offered – and most importantly, the tenure of the loan. Most lenders offer a period of 5 to 7 years, depending on the condition of the car, how much it has run (mileage), and of course, its age.

Deciding on the tenure of a used car loan can be tough – you may be able to reduce your monthly instalments with a longer term; but is that an ideal solution?

Also Read: How to arrange a loan for a pre-owned car?

Importance of Tenure in Used Car Loan Financing

The longer the tenure you choose, the lower will be the monthly instalments; however, the total interest component will be much higher than when you choose a lower term. A shorter tenure also means that you will be debt free sooner.

This used car loan calculator example may help you understand it better:

You take a loan of ₹5 lakhs, at an interest rate of 10%.
 

A. Your tenure is 36 months. You will pay:

• Monthly instalment of ₹18,056
• Interest on the loan –  ₹1,50,000
• Total amount ₹6,50,016
   

B. You choose tenure of 48 months. You will pay:

• Monthly instalment ₹14,583
• Interest on the loan ₹2,00,000
• Total amount ₹6,99,984

So, you can see that with 12 more months added to the tenure, your instalment per month is lower, but you eventually pay ₹50,000 more overall for your used car.
               

Factors to Consider While Choosing Loan Tenure

In the above example, we have seen how tenure impacts the monthly instalment, the interest on the loan, and the total amount you eventually pay. Both have their pros and cons. The tenure ideally should not be very long, but it also depends on a few other factors. Let us see what they are.

Also Read: Getting The Best Interest Rate On A Used Car Loan-Everything You Need To Know

Consider Your Monthly Disposable Income

Deduct your monthly expenses from your net income – that is your disposable income or your surplus. The monthly expenses should include your utility and grocery bills, premiums, other loan instalments, investment instalments (RDs, SIPS, etc.) and so on. You also need to keep aside some money for emergencies.
 

What will be your Likely Future Cash Flows?

If you are due for a raise or promotion – or maybe you have got a better job with a bigger salary, perhaps you can afford a higher monthly instalment. On the other hand, if there is a major expense coming up, like home renovation, big appliance purchase, a family wedding or so on, you may need to opt for a lower monthly instalment.

Are you Planning to Pre-pay?

Some people choose the longest tenure and then prepay part of the loan – if you are expecting a big amount coming to you in the near future, you can choose this method. However, it is important to check if your lender levies prepayment charges.

Also Read: All Your Car Loan Questions Answered

Car's Value Diminish

Car's value go down each year, and they also undergo wear and tear; with a long tenure, you are paying a lot more money. You need to consider whether all the extra money is really worth it, as by the time you close the loan, the car’s value would have significantly diminished.
 
This should give you a fair idea of how long you should finance the used car you plan to buy. No matter what, it is always better to take the shortest tenure you can afford; you can economise and curtail your expenses for a few years, so that you can close the loan and own your vehicle undisputedly.

When you go shopping, you will find several second-hand cars with finance available; apart from the car dealer, it’s also important to ensure that the lender is backed by a reputed name in the industry.