Securing a Car Loan is a crucial step towards owning your dream vehicle, but understanding how Car Loan tenure affects your EMI calculation is equally important. The tenure you choose can dramatically influence your monthly payments and the total interest you end up paying. Equip yourself with this knowledge to make a well-informed decision that aligns with your financial goals.
The basics of EMI calculation
Equated Monthly Instalment (EMI) is the fixed monthly payment you make to repay your Car Loan over a specified period. The EMI consists of both principal and interest components. The formula for calculating EMIs is as follows:
EMI = [P x r x (1 + r)n] / [(1+r)n – 1]
Where:
- P = Principal loan amount
- r = Monthly interest rate (annual interest rate divided by 12)
- n = Loan tenure in months
The Car Loan interest rate and tenure directly influence the EMI. A longer tenure usually results in a lower EMI, while a shorter tenure results in a higher EMI, but with lesser interest outgo.
How Car Loan tenure affects EMI calculation
Let's break down how varying tenures impact your Car Loan EMIs with a practical example. Assume you take a Car Loan of ₹10,00,000 at an annual interest rate of 8%.
| Loan amount
|
Interest rate (per annum) |
Tenure |
EMI |
Total amount paid |
Total interest paid |
| ₹10,00,000 |
8% |
3 years |
₹31,336 |
₹11,28,109 |
₹1,28,109 |
| ₹10,00,000 |
8% |
5 years |
₹20,276 |
₹12,16,584 |
₹2,16,584 |
| ₹10,00,000 |
8% |
7 years |
₹15,586 |
₹13,09,242 |
₹3,09,242 |
From the examples, it's evident that a longer tenure results in a lower EMI but increases the total interest paid over the loan period. Conversely, a shorter tenure has higher EMIs, but results in lower total interest payments.
Factors to consider when choosing loan tenure
Monthly budget
Assess your monthly income and expenses to determine how much you can comfortably allocate towards your Car Loan EMI. A lower EMI might fit better within your budget but will extend the repayment period and increase the total interest paid.
Total interest payable
While a longer tenure reduces the EMI, it increases the total interest paid. Calculate the total interest for different tenures and decide what you are comfortable with. A shorter tenure might seem challenging with higher EMIs but will save you money in the long run.
Financial goals
Align your loan tenure with your broader financial goals. If you aim to be debt-free sooner and save on interest, opt for a shorter tenure. If maintaining lower monthly outflows is crucial, a longer tenure might be more suitable.
Future income prospects
Consider your future income prospects when choosing the loan tenure. If you expect a steady increase in your income, you might manage higher EMIs with a shorter tenure more comfortably.
Also Read: Understanding Car loan tenure
Conclusion
Does Car Loan tenure affect EMI calculation? Absolutely, and understanding this relationship can help you make the best financial decision.
A shorter tenure results in higher EMIs but saves on total interest, while a longer tenure offers lower EMIs at the cost of higher interest payments. Consider your monthly budget, total interest payable, financial goals and future income prospects when choosing your loan tenure. Utilise a Car Loan EMI Calculator to compare different scenarios and select the most suitable option for your needs.
Axis Bank Car Loans offer attractive benefits, such as up to 100% on-road funding, flexible loan amounts starting from ₹1,00,000, and special benefits for priority banking. These features can help you manage your finances effectively and make your dream of owning a car a reality.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
