Car Loan: Should you go for a shorter or longer tenure?

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Updated: Oct 28, 2020 5:08 PM

Even though having a shorter tenure leads to paying higher EMI amounts, at the same time it also reduces the interest costs.

car loan, pre-used car loan, things to keep in mind while opting for a pre-used car loan, car loan interest rates, Tenure of loan, Type of CarEven though many opt for the longer tenure, hoping to get extra time to pay off the debt, but it also includes higher interest outgo and added financial burden.

 

Buying a house or a car is among the big financial decisions that one takes. Many people usually finance these things by taking a loan. Experts say people planning to buy a car should consider it now, as currently, the car loan interest rates are the lowest they have been in many years.

Most lenders offer car loans for a maximum tenure of 7-8 years. The State Bank of India, for instance, offers car loans for a longer tenure of 7 years. However, experts say while opting for a car loan, borrowers should opt for shorter tenures, after taking into consideration the EMIs.

Even though having a shorter tenure leads to paying higher EMI amounts, at the same time it also reduces the interest costs. Hence, having a shorter tenure will allow the borrower to pay off their loan sooner.

For instance, if you take a loan of Rs 8 lakh with an interest rate of 9.5 per cent, the EMI for a 4-year car loan will be Rs 20,099, whereas the EMI for an 8-year car loan will be Rs 11,929 which is almost half of what you will have to pay in the 8-year tenure. The interest paid on a 4-year car loan comes to Rs. 1.64 lakh, whereas the interest paid on an 8-year car loan comes to Rs 3.45 lakhs, which is double what you would have paid with a 4-year tenure.

Even though many opt for the longer tenure, hoping to get extra time to pay off the debt, but it also includes higher interest outgo and added financial burden. As explained in the above example, the longer car-loan tenure you opt for, the higher the interest outgo will be for you. Hence, experts say this is one of the main reasons why a borrower should avoid opting for a long loan tenure.

Another point to consider is that the interest rates charged on longer tenures are higher as compared to shorter loan tenures. Lenders typically charge a higher interest rate of around 50 basis points higher on the car loan for a longer tenure. This is their way to compensate for the additional credit risk that the banks are taking on the borrower.

Additionally, the average usage period of a car is usually 5 years, after which it is normally sold to a second-hand user. Having a long-term loan tenure will then become a hassle as the car owner will have to continue to repay the outstanding loan on the car even after selling it.

Experts say borrowers should note that car manufacturers usually do not give an 8-year warranty, hence, there will be heavy maintenance charges after the initial few years of buying the car. The higher maintenance charges along with the EMI will become a heavy financial burden for the borrower.

Note that, even though most dream about buying a car, they are a depreciating asset. Hence, be careful while opting for a car loan. Along with the interest rate, also check for the pre-payment charges, processing fee, and other associated charges with the car loan. Additionally, with a good credit score, you can negotiate with the lender for better rates and a waiver of charges.

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