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-   -   Your preferred car loan duration (https://www.team-bhp.com/forum/indian-car-loans-insurance/188191-your-preferred-car-loan-duration.html)

In the 80s, car loans were unheard of in India, with most people buying cars on cash. When the floodgates opened in the 90s, MNC car manufacturers & private banks changed the landscape completely. 3 year loans were standard-fare from 1995 through the early 2000s, with interest rates hovering at a steep 14 - 18%. In the 2000s, the market matured, auto loans became more mainstream & car sales shot through the roof. Loan tenures got longer and interest rates dropped.

Today, over 2/3rds of all cars sold in India are financed, while interest rates are in the single digits on new cars (low double digits on used). The average loan duration has also gotten longer. What's more, I've seen ads for car loans up to 7 years / 84 months (related thread)!

So, what is your preferred loan tenure?

We usually take car loans for anywhere between 3 - 5 years. As a businessman, it makes sense. For one, the interest can be written off as a business expense. Second, car loans are cheap; the same capital can get me better returns in my investments.

However, as an individual, I HATE loans and have actually foreclosed some loans before time.

Would also strongly recommend taking a car loan against your fixed deposit. If interested, read the discussion from here and here.

Please vote on this poll. For a change, I've kept the votes private since some BHPians might want to maintain their privacy around their choice.

Related Threads:

How to get low EMIs

Foreclosure - Why the circus?

SBI Advantage Car Loan

Cash, OD or Loan?

Businessmen - Loan or outright?

I guess five years period is the best. It keeps the EMI low enough. On an average most people keep their cars for minimum 5 years.

Take loan of 5 years, keep your car for at least 10 years. 5 years you repay the loans and next 5 years you enjoy EMI free life and save good enough for the next down payment for a new car.

Though my next preference would be buying from savings if you have enough capital and it is not required soon in future.

I prefer taking a car loan for the maximum available tenure, which is normally for 7 years so that the EMI outflow is less. Once this is done, I accumulate surplus funds in an RD and try to pay it off within the first two years. Have done that for the current car that I got in 2013.

+ 1 to that, I did the same when I bought my Etios in 2012, I used an Equity MF instead of RD though. :thumbs up

How is this a good move? You end up paying interest that you could've avoided.

I accumulate the surplus and close the loan much before the tenure, why isn't that a good move? I know the interest outlay is much higher during the initial years, but since I do not have excess money then to put into the loan, I accumulate that and close it at once. I do save on 5 years worth of interest by paying it sooner.

Another way of doing this is to keep paying the excess at a regular intervals, but not many banks allow it.

Completely agree with fine69 here.

With the EMI concept, majority of the interest component in recovered in the initial years. Lets say that in a 7 year loan, majority interest will be recovered within the first 3 years of the loan. Trying to repay the loan after the initial 45-50% tenure of the loan is a loss for the borrower and a double advantage for the lender, since the lender already recovered most of the interest of the 7 year term and also gets his money back, to lend it again.

Again, for loans such as car loans which are not exactly as tightly monitored as say home loans (No repayment charges, linked to RBI rate etc etc), you would almost always end up at a disadvantage since most private banks have either repayment charges or lock in periods. So, take a car loan only and only if it is a necessity or you can utilize the funds somewhere else which will give you a return higher than the ROI.

Here people only borrow if they cannot afford the entire amount as down payment, and hence the tenure would always depend on the EMI affordability per month of the borrower. There is no point in taking loan because one can take the benefit of interest as an expense in case of a firm/company, since it will still cost the firm 65% of the interest as additional expense, which, according to me should be avoided if there are unused funds lying.

I voted for 5 years since thats the EMI I could afford and I opted for it. 3 years was a bit of a stretch for me.
There, ideally, should not be any "Ideal" car loan duration. Ideal = affordability.

No car loans for me. Somehow I do not like the idea of loans and interest. No wait, I think I like to earn interest - but paying interest is something I'm allergic to.

But that's just my weird thing. For others, this is the right thing to do -

Down payment: Whatever cash is available in savings account, fixed deposits and debt mutual funds. If the amount is more than the car value, no need to take a loan. No point in earning 4% to 7% interest pa and paying 10% to the bank

Loan Tenure:

There are two types of people - those who like to invest in fixed deposits and those who like to invest in equities (including own business)

1) For the FD type person, the most logical thing to do would be to choose the shortest possible car loan tenure. The actual tenure you pick should depend on current cash flows (income minus expenses) and estimated future cash flows.

2) For business owners (or even for those who regularly invest in equity MFs), it does make sense to opt for the longest possible tenure. Pay 10% interest to bank and earn 15% or 20% per annum (inclusive of tax benefits) by deploying cash in business. However, one does need to remember that returns in own business or equities is not guaranteed (while interest you pay to bank is fixed beforehand)

Taking a loan for a tenure of 3 years and then repaying in 2 still looks better but what if the loan tenure available was upto 15 years. Would you've taken a loan for 15 years because then the EMI would've been even lower.

I understand that the cushion is much more with a 7 yr loan tenure but this cushion comes at a cost. You'd need to quickly put the numbers in excel and see whether the cushion you're looking for has been bought by you at the right price.

Beautifully put, end of discussion! :)

Precisely.

I had my car loan with SBI Advantage and get super flexibility. Almost 40% of my loan is already paid of in the 15 months and I am on track to finish the entire loan amount in the next 12 months. SBI Advantage gives you the option of paying interest for only the outstanding principal amount, which is low in my case. Almost all my savings are funneled into this loan. Thus the total interest paid out to the bank for the total tenure of the loan is very low.

Another advantage of the 'SBI Advantage' loan is that the eligible withdrawal amount can be transferred to the linked savings bank account that can be then used in an emergency. Thus, I would then start paying interest and EMIs only on the withdrawn amount. So overall, this is a win-win situation in my case.

Due to the "advantage" factor of this type of loan, my car loan tenure is 7 years.

Interest payable for 2 years on a 7 year loan is 121698.45 for a 6.5L loan at 10.40% interest rate. The same if paid over a total of 7 years is 267748.45, that's a total savings of 146050. Why is this bad? Now, the same if taken on a 5 year loan, paid off in two years, interest is 106304.13 and the saving on the amount is around 80k. A typical RD interest for a >12 month period back in 2013 was around ~10.5%, So net net, for me I did end up saving money, didn't I?

I don't really understand this discussion and here is why:

Banks are in the business of making loans to make profit by making these at rates higher than what they pay you as interest on your money with them. So there is no way to come out ahead by taking a loan and keeping cash with banks in any way, in any kind of deposit. And in India, this spread is higher than in the West because it has to cover banking sector inefficiencies including things like loan waivers and NPAs.

To my mind, one should not take loans to buy assets that lose value; it only makes sense to buy real estate on borrowed money, if that is appreciating in value at rates higher than the interest rate.

If one must still take a loan to buy a car, the amount and the duration should be as low as possible.

The only economic justification to take a loan is when one can make more money from the amount borrowed than what is paid for it as interest. And that is possible by investing in equities with an associated risk that must be successfully managed. Or in business, where too the risk needs to be successfully managed - the business has to earn higher ROI than the interest paid for the I, the investment.

I'm an aggressive equity investor, for people like me the best thing is to take the car loan for maximum tenure and deploy my savings into equity. The lowest long term return I got is above 15%. I don't find any reason not to take a car loan. And top of that I can write off the interest as expenses. But car loan is a no go for people who are parking money in FD,RD,Debt and the like.

Those who are planning to take a loan, if possible put the same amount in mutual funds and see the results at the end of loan tenure. Unless you get caught in a bad bear market you will come out with good surplus when compared to FD!

That is a big "unless" there of course. But with that said, what you say is true for obvious reasons. With FD all you are earning is for use of the money, which is just a little more than the inflation rate. But in return, there is no risk, so you don't deserve to earn more. Risk and returns always go hand in hand, and if one has the skill, nerve and the appetite to successfully manage and live with the risk in equities, then that will bring the consequent rewards. There will be similar rewards in a more intimate form of equity - one's own business. But how much percent of those that take car loans to buy cars come in that bracket?

The one big problem I see with the current folk in their thirties is that few are building a retirement corpus in a country where there is zero social security. Instead most are in the red with loans of various kinds of which only those taken against real estate make some economic sense.