Getting a loan is always a matter of priorities. A two-wheeler is a basic necessity; however, the cost of buying one must be justified. If you opt for a low EMI based on your two wheeler loan eligibility, you invariably end up increasing the tenure. This can be bad news given the extra amount you will end up paying by way of interest. If anything, going for a longer tenure should be an option of the last resort as it can impact other financial priorities and eat into your living expenses.
Let’s take a quick look at how loan tenure can impact your finances:
Why is loan tenure important?
A lender considers your age, repayment capacity, and tenure to determine the interest rate on your two wheeler loan. Since a longer tenure increases its risk exposure, the lender hikes the interest rate.
In case you opt for a zero down payment bike loan, you will be able to bring home a two-wheeler at practically no cost. However, the interest component is considerably higher, owing to the increased risk factor. Hence, it makes sense to opt for the shortest possible tenure that is feasible for you. Let’s illustrate this with an example:
If you opt for a bike loan worth Rs. 1 lakh @ 10% p.a:
For a tenure of 12 months, the EMI may be high. However, the interest component will be considerably less as compared to a higher repayment period with a lower EMI. In case, your existing liabilities are high, or you have had a dip in your income; opting for an extended loan tenure can be an alternative.
Short-term and long-term loans compared
Most NBFCs and banks approve short-term two-wheeler loans on an expedited basis. For a tenure under one year, the risk exposure to the lender is minimal. As such, you can get a two-wheeler loan without much documentation. On the other hand, a shorter tenure means a higher monthly outflow for you as the borrower.
In contrast, long-term loans are cheaper, and it is easier for applicants to get approval for higher amounts. The downside is that the compounded interest is greater and prepayment charges are likely to be levied if you attempt to repay the loan in advance.
What is the ideal tenure for two-wheeler loan?
If you have enough liquidity, it makes better sense to pay a higher EMI and repay the loan quicker, provided there are no prepayment charges. If your existing financial obligations do not allow you to take on a higher EMI burden, it is wise to consider a long-term horizon. Your strategy must take into account your short-term and long-term financial commitments.
A bike loan EMI calculator can help you decide the best course of action when it comes to choosing the right two-wheeler loan. Another popular workaround is to approach your local dealer for advice on the best two wheeler loan for your needs.
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