Even though having a shorter tenure means paying higher EMIs, it also means reduced interest costs.
Buying a house or a car is one of the big financial decisions that one takes, and many usually get these expenses financed by taking out a loan. Having said that, while taking a loan the borrower needs to make many decisions like which EMI option to choose, what tenure to opt for, etc.
Generally, lenders offer car loans for a maximum tenure of 7 to 8 years. For instance, SBI offers car loans for a tenure of 7 years. Experts say while opting for a car loan, even though lenders now offer longer tenures, borrowers should opt for shorter tenures, after taking into consideration the EMIs.
Having a shorter tenure could lead to paying higher EMI amounts. However, even though having a shorter tenure means paying higher EMIs, it also means reduced interest costs. Hence, having a shorter tenure will allow you to pay off your loan sooner.
For instance, if you take a car loan of Rs 10 lakh with an interest rate of 8.5 per cent, the EMI for a 4-year car loan will be around Rs 24,000, whereas the EMI for an 8-year car loan will be Rs around 14,000, which is almost half of what you will have to pay in the 4-year tenure. The interest paid on a 4-year car loan comes to around Rs 1.83 lakh, whereas the interest paid on an 8-year car loan comes to around Rs 3.81 lakh, which is more than double what you would have paid with a 4-year tenure.
Usually, people opt for a longer tenure to get that extra time to pay off the debt, however, it also includes higher interest outgo and added financial burden. Keep in mind, the longer car-loan tenure you opt for, the higher the interest outgo will be for you. Hence, experts suggest avoiding higher interest is one of the main reasons why a borrower should avoid opting for a long loan tenure.
Another point to consider is that as compared to shorter loan tenures, the interest rates charged on longer tenures are higher. Lenders usually charge a higher interest rate of around 50 basis points, on the car loan for a longer tenure. Industry experts say this is the banks/lenders way to compensate for the additional credit risk that they are taking on the borrower.
Another point to note is the average usage period of a car is usually 5-6 years, after which it is either sold or given to a second-hand dealer. Experts point out, having a long-term loan tenure then becomes a hassle as the car owner will have to continue to repay the outstanding loan on the car even after selling it. Along with that car manufacturers generally 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 could become a heavy financial burden for you.
Experts say, even though most dream about buying a car, they are a depreciating asset, which borrowers should keep in mind. Hence, be careful while opting for a car loan. Along with the interest rate, also check for processing fees, pre-payment charges, and other associated charges with the car loan. Additionally, with a good credit score, a borrower can negotiate with the lender for better rates and a waiver of charges.