Buying new tyres is typically an important decision for many vehicle owners. Good quality tyres are essential for safety, performance, and fuel efficiency, but they usually come with a high price tag. This often leads many people to consider taking a loan to buy tyres. Before taking a loan for tyres, there are generally several factors to consider. This article will help you to know things to consider before taking a loan for tyres, which you should keep in mind to make a well-informed decision.
Factors to Consider Before Applying for a Tyre Loan
Here are a few pre-loan considerations for tyres that every fleet owner must know:
1. Assessing the Need
Begin by determining whether your vehicle needs new tyres or whether older ones can serve you for an additional period. Tyres usually have a 3-5 years lifespan based on usage patterns, yet appropriate maintenance leads to radial tyre endurance of about 6 years.
So, evaluate tyre depth, signs of damage or bulging, vehicle usage, and manufacturer recommendations to determine if new tyres are necessary before applying for a loan. The need for a loan disappears when the tyres remain usable for additional mileage.
2. Considering Second-hand or Retreads
If budget is a constraint but the tyres are worn out and unsafe, consider more affordable options like good quality retreads or second-hand tyres as an alternative to taking a loan. Retreading reuses the core structure of old tyres by replacing just the tread.
If bought from a reputable dealer, retreads can offer at least 60-80% of new tyre life at half the price. Pre-used tyres with acceptable tread depth are also cheaper. While not ideal for long distances, these options can work for daily city commutes.
3. Checking Alternate Finance Options
Before taking a loan, check if you have other finance options. Using a credit card allows interest-free credit for up to 50 days on purchases, while some cards even offer 6-to 12-month Equated Monthly Instalment (EMI) schemes. Many tyre dealers also tie up with non-banking financial companies (NBFCs) to offer financing schemes, usually at lower interest rates. Such options may be cheaper than an expensive personal or vehicle loan if you can pay it back as per the financial institution's policies.
4. Analysing Repayment Capacity
The most critical aspect is evaluating your repayment capacity before taking the loan. Make a household budget to see how much surplus money you have to cover the EMI. Factor in expenses on fuel, insurance, maintenance, etc, along with loan EMIs for the vehicle, if any.
Also, account for other financial obligations like children's education, medical needs, and expenses on essentials. Avoid taking further debt if more than 50% of your income goes towards existing loan repayments. Taking on additional debt when you are already stretched financially can lead to defaults and negatively impact your credit score.
5. Comparing Lending Options
Before deciding on a loan provider, it is necessary to thoroughly compare various lending options from banks and NBFCs. Compare the interest rates, loan amount offered, loan tenure, processing fees, and foreclosure charges. Opt for financial institutions offering loans specifically for tyres rather than personal or vehicle loans.
Additionally, online loan providers also offer tyre loans with minimal documentation, quick approval,l and disbursal. However, factor in aspects like transparency of charges, customer service standards, etc., before choosing the financial institution.
6. Analysing Interest Rates
Interest rate is a key factor affecting loan affordability. With tyre loan tenure ranging from 6 months to 2 years, the interest component can be substantial. For instance, a ₹ 40,000 tyre loan with 18% interest for the tenure of 1 year means you pay ₹ 7,200 extra as interest charges.
So, carefully analyse the impact of a 1-2% higher interest rate on your total repayment amount before finalising the loan provider. Make sure to check if the interest rate offered is flat for the entire tenure or reduced with timely repayments.
7. Reading Terms and Conditions
Carefully read the fine print before signing the loan agreement. Check aspects like interest rate structure, processing charges, pre-payment penalties, no-dues certification charges, etc. Some loan providers usually levy a 2-3% prepayment penalty if you close the loan before the tenure.
Moreover, the processing fee also varies from 1-5% of the loan amount. Account for these extra charges in your loan affordability calculation. Also, ensure there are no hidden costs, and the agreement clearly states the repayment schedule, disbursal timelines, and the procedure in case of payment issues.
8. Considering Loan Tenure
Loan tenure is the duration given to repay the loan amount. The tenure offered for tyre loans usually ranges up to 12 months. Banks and NBFCs generally charge higher interest rates for longer-tenure loans. So, carefully evaluate whether you should opt for a 6-month or 12-month loan even if lower EMIs are offered.
A longer tenure means paying more interest charges overall. On the flip side, longer tenure has lower EMIs, so evaluate this tradeoff according to your cash flows.
9. Avoiding Over-financing
A common mistake is taking out a bigger loan than necessary and using the surplus for other expenses. Avoid this temptation and borrow only the amount needed for the tyres after getting a firm quote from the tyre dealer.
Account for any registration, road tax and installation charges also in the loan amount. Over-financing for other discretionary purchases can over-burden your finances and jeopardise loan repayment capacity.
10. Checking Implications of Delay or Default
Understand the implications in case you miss your EMI payments occasionally or face a temporary cash crunch. Many loan providers allow a few weeks of delay by charging a penalty over and above the EMI. However, beyond this grace period, high penal interest rates apply along with charges for issuing reminders.
The account is classified as a Non-Performing Asset (NPA) after 90 days of non-payment, after which legal proceedings for recovery can be initiated. Also, check if the loan provider reports defaults to CIBIL, which can diminish your credit score, making future loans costlier.
Conclusion
Taking a small loan specifically to fund tyre replacement may seem convenient. However, you must assess your repayment capacity, compare options on interest rate and tenure, and analyse the terms and conditions carefully before taking on the obligation. Avoid over-borrowing beyond what you require, and make sure to factor in approval and disbursal timelines. While a tyre loan can ensure road safety in the case of worn-out tyres, being prudent about your financing decision ensures loan repayment doesn't become a financial burden. Careful evaluation by comparing options and your household cash flows is vital before borrowing money, even for a necessity like tyres.
