If you have decided to take a two-wheeler bike loan, you must be searching for various ways to get the best deal for your loan. And like most people, you might be focusing on getting the lowest monthly EMI. Here is a quick suggestion. Don’t just aim for the getting the lowest EMI; focus on how you can save on interest and the lower the total cost of the loan. It’s here that the tenure of the loan can make a lot of difference. If you choose the right tenure for your bike loan, you will end up saving money.
The tenure (in addition to other criteria such as age and income) also helps the lender make an informed assessment about the applicant and check whether he/she will be able to repay the loan.
Let’s quickly understand more about loan tenure and its impact on the total loan cost.
What is Loan Tenure?
Simply put, the loan tenure is the amount of time sanctioned to the loanee to repay the loan he/she has taken from the financial institutions. Personal loans, loans on vehicles, education loans etc. have shorter tenure in comparison to home loans.
Effect of Loan Tenure on Loan Repayment
One mistake that most loan applicants commit is focusing only on the EMI charge and not the rate of interest or more importantly, a tenure that could have helped save a lot of money.
Let us do some simple calculations for a better understanding.
Loan amount = Rs 1 lakh
Rate of Interest = 10% per annum
Clearly, if the tenure is only for a year, the rate of EMI will be high but the rate of interest will be lower. On the other hand, if the tenure increases, the EMI will be less but the rate of interest will almost double up. The increase will progress as the tenure extends. However, this is a decision that is subjective to the applicant’s financial ability.
a) Shorter Tenure: Pros and Cons
- Relaxed Eligibility: Most lenders, for short term loans, do not undertake a stringent background check. Such loans are granted without a hassle.
- Quick Approval: Since the norms for such loans are relaxed, financial institutions usually sanction the amount in a couple of hours or days.
- Easy and Fast Return: Usually, such loans are quick to repay and are better options for those who do not want to stay under debt for long.
- Less Paperwork: Documentations required in short term loans are not very extensive and can be satisfied with paperwork citing monthly bank statements, salary slips and identification.
- High EMI: Since the tenure in such cases is short, financial institutions raise the EMI bar. Sometimes, these EMIs are multiple times higher compared to those of long-term loans.
- High Risk: It is often tempting to get short term loans to buy a vehicle but if the cash flow is tight, paying back this amount will become difficult. This can also end up being a habit, considering the process requires less paperwork and time, ultimately denting your credit score.
b) Longer Tenure: Pros and Cons
- Low EMI: Long tenure loans are backed by low EMIs, which makes paying back the loan amount easier.
- Large Loan Amount Granted: Loans with longer tenure tend to grant more amount than shorter tenure.
- Can be Used to Consolidate Other Financial Matters: Since the EMI amount on such loans is comparatively lower, this allows the loanee to stretch his budget for other important goals.
- High Rate of Interest: Since the tenure for this loan is longer, the cumulative rate of interest will be higher, which will increase the final amount to be paid.
- High Interest on Prepayment: Pre-paying long term loans attract a higher rate of interest which will eventually impact the total amount to be re-paid.
What Should Be Your Two-Wheeler Loan Tenure?
There is no such thing as an ‘ideal’ two-wheeler loan tenure since financial situations vary for everyone. If you can afford to pay a higher monthly EMI, then try to choose a short loan tenure as you will end up paying less rate of interest. If you are running low on money, then a longer tenure of around 3-4 years would be a good time to repay the loan. The longest tenure should be chosen only if you are under extreme financial distress since you are going to end up paying a lot more than the original principal amount.
Finally, the tenure of you loan should be what you can comfortably pay. However, it’s also an important factor to consider, apart from your monthly EMI, when you are choosing a bike loan. Always remember that the longer the long tenure, the higher the interest rate and the higher the total loan cost. Now that you are armed with all the information, go ahead and buy that dream bike.