Car loans explained: tenure, prepayment and getting the RC cleared

A car loan pays for a car now, and you repay it in monthly instalments. Until you finish, the car itself is the lender’s security: it is pledged to them and their name sits on the car’s papers. That makes it cheaper than an unsecured loan, but it comes with three things worth understanding before you sign.

1. Tenure decides the total cost. A longer loan spreads the money over more months, so each EMI is smaller. But you pay interest for longer, so the total goes up.

In this illustration, stretching from five to seven years saves about 2,800 rupees a month but costs around 64,000 rupees more in interest. The low EMI looks friendly; the total is what you actually pay.

2. Fixed or floating decides whether prepaying is free. RBI’s 2025 directions say lenders cannot charge you for prepaying a floating-rate loan taken as an individual for non-business use, in part or in full, with no lock-in. That covers loans sanctioned or renewed from 1 January 2026. Many car loans are fixed-rate, though, and then the lender’s own policy applies. Either way, any foreclosure charge must be shown in your Key Fact Statement, and a charge not disclosed there cannot be levied.

Did you know? Since October 2024, every new retail loan must come with a Key Fact Statement that shows the APR, the full yearly cost including the processing fee and other charges, per the RBI. Comparing two car loans on APR, not just the interest rate, shows which is really cheaper. And under the 2025 RBI directions, if the lender is the one asking you to prepay, it cannot charge you at all.

3. The step people forget: clear the RC. While the loan runs, the lender’s interest is recorded on the car’s registration certificate (RC) as hypothecation. Paying the last EMI does not remove it. You have to ask.

Skip this and the lender’s name stays on your RC, which can hold up a sale years later. Requirements vary a little by state, so check with your regional transport office (RTO).

The takeaway. Choose the shortest tenure you can comfortably afford, compare loans on APR, check whether the rate is fixed or floating before you plan to prepay, and clear the RC as soon as the loan ends.

More to read: should you prepay a loan, home loan basics, and how EMIs really work.