3-year vs 6-year loan tenure: Which option is smarter for your car purchase? | Mint

I am planning to buy a car worth ₹7 lakh and am considering taking a vehicle loan. I’m evaluating a 3-year versus a 6-year loan tenure. While I can afford a higher EMI, I’m unsure whether opting for a shorter tenure is the right financial decision. What key factors should I consider before finalizing the loan tenure?

-Name withheld on request

When taking a vehicle loan, the repayment tenure plays a significant role in determining the overall cost of borrowing. The tenure refers to the duration over which the loan is repaid in fixed equal monthly instalments (EMIs). Typically, vehicle loan tenures range from 12 months to 84 months, depending on the lender and the borrower’s eligibility.

Shorter tenure vs longer tenure

Shorter tenure (1 to 3 years): A shorter repayment period means higher EMIs but allows the loan to be cleared faster. Since the loan is repaid in a shorter duration, the total interest paid over the loan period is lower.

Example: If you take a ₹5 lakh loan for 3 years at an interest rate of 10% per annum, the EMI would be approximately ₹16,134. The total interest paid over 3 years would amount to ₹80,824.

Longer tenure (4 to 7 years): A longer repayment period reduces the EMI amount, making it more affordable on a monthly basis. However, since interest is charged over a longer period, the total interest paid increases.

Example: If the same ₹5 lakh loan is taken for 6 years at an interest rate of 10% per annum, the EMI would be approximately ₹9,270. The total interest paid over 6 years would be around ₹1.67 lakh—almost double the interest compared to the 3-year tenure.

Impact on interest costs

The interest cost depends on both the tenure and the interest rate applied. A longer tenure results in higher total interest payments, while a shorter tenure leads to higher EMIs but lower overall interest.

For instance, consider a ₹7 lakh loan at a 9% interest:

For 3 years: EMI ~ ₹22,276; Total Interest ~ ₹1.01 lakh

For 6 years: EMI ~ ₹12,583; Total Interest ~ ₹2.05 lakh

As shown, the longer tenure reduces the monthly EMI but nearly doubles the total interest paid.

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Choosing the right tenure

Borrowers should decide on the tenure based on their monthly cash flow and ability to pay higher EMIs. If your financial stability allows, opting for a shorter tenure will help save on interest costs. However, if you need a lower EMI for affordability, a longer tenure may be more suitable, but be prepared for the higher total interest.

Non-banking financial companies (NBFCs) offer flexible tenure options to meet customer needs. It is advisable to use loan calculators to compare the costs of different tenures before finalizing a loan.

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For any queries regarding vehicle loans, customers may reach out to their financial service providers for further guidance.

Akash Bararia, Head – Sales Finance, HDB Financial Services.