How to choose the best two-wheeler loan tenure

Covid-19 pandemic makes us reconsider using public transport for daily commute to work as well as for personal purposes.

By Sumit Chhazed, Co-founder, OTO

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Covid 19 pandemic has changed our lives completely. We are reconsidering using public transport for daily commute to work as well as for personal purposes. Even though social distancing was implemented in public places to limit the transmission of the virus, it hasn’t reduced the hysteria and panic as we can’t be sure of how many people have taken public transport leaving the trace of infection behind. As a result, more and more people are switching towards two-wheelers for personal mobility. But why two-wheelers?

Because they are more convenient for daily commuting, have a low cost of maintenance, navigation through heavy traffic, it can also keep you away from crowded places and is most affordable as it squeezes into your budget.

Three crucial elements to consider while getting a two-wheeler on loan are, EMI, tenure and interest rate. Choosing the perfect tenure can look easy on the surface, but if you want to save money, you need to make smart decisions. Interest rate is the crucial factor that must be considered before applying for a loan along with tenure.

So why is loan tenure important?

The term ‘tenure’ is the amount of time given to a borrower to repay the loan taken from any financial institution. It is measured in terms of years. A lender like Banks and NBFCs would consider your age, repayment capacity, and tenure before fixing the interest rate. One common mistake that a borrower makes is giving more weightage to EMI charges over tenure and interest rate.

Here’s a guide to choosing the best two wheeler loan tenure:

1-year tenure – Ideally for those customers who can afford to pay a higher EMI amount at a lower rate of interest. Here the cost of ownership is a factor that is considered by the buyer and this group of buyers have a stable income and would prefer to own the vehicle immediately.

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2-year tenure – This is the most balanced tenure. Buyers who fall in the middle-class income category choose this tenure, as the EMI amount plus the interest costs associated with it are considered optimal when compared to the 3 or 4 year tenures.

Note: In general, companies and other banks that deal in two-wheeler financing, suggest 2-year tenure as an ideal tenure chosen by their customers.

3-year tenure – If you are a person who wishes to optimize monthly cash flows through lower EMI’s at a higher rate of interest, this tenure is ideal for you. But why a high rate of interest applied on loans with a longer tenure? Because longer the tenure higher the cost acquisition as a result some moneylenders may charge higher interest to meet the uncertainties to an extent.

Let’s say, if the price of the two-wheeler is Rs 1 lakh and the interest rate is 12 per cent per annum, and if you have opted for a 1-year tenure, the EMI would be Rs 9334 and interest payable for the annum is Rs 12,008. However, if you have opted for 2-year tenure, EMI would come down to Rs 5167 with an interest cost of Rs 24,008 and for 3-year tenure the EMI is calculated at Rs 3,778 and interest is estimated to be Rs 36,008 per annum. Here, the EMI to be paid every month is reduced in accordance with the tenure, on the contrary the interest payable soars up 3x times.

Benefits of choosing EMI

Opting EMI comes with an endless number of benefits. The first and foremost benefit of purchasing a two-wheeler through EMI is that you need not pay the full amount upfront. With the help of EMI or Equated Monthly Installment, you can pay a piece of it every month. Regular on-time payment could improve your credit profile which in turn can help you avail of other loans such as house loans, personal loans, etc in the future. The funds that you saved can be utilized at the time of crisis or emergencies and also can be invested in stocks, shares, etc., which can inculcate a savings habit.

So, should you consider the loan tenure? Yes, you may or may not. But you should keep in mind that there is no ideal tenure period as it differs from person to person. It depends upon the requirements and affordability of the borrower. If you are someone who wants to save on interest costs, then opt for a shorter tenure. The same goes for the EMI amount. In case you want to pay less EMI then consider taking up longer tenure. The loan principal, interest rate, EMI amount, and additional benefits such as processing fee, cashback, discount, and approval time should also be given utmost importance while choosing a two-wheeler loan and tenure. In a nutshell, it all depends on you and your economic well-being.