While taking a loan to buy a car, keep this one thing in mind, you will be in profit
Car Loan Tips: Buying a house or a car is one of the big financial decisions that one takes. There are many decisions that the borrower needs to take while taking the loan, such as which EMI option to choose, what tenor to choose, etc. Generally, lenders offer car loans for a maximum tenure of 7 to 8 years. For example, SBI offers car loans with tenures of 7 years. Experts say that while opting for a car loan, even though lenders now offer longer tenure, borrowers should opt for a shorter tenure keeping the EMI in mind.
The shorter the tenure, the higher the EMI amount can be paid. However, even though a shorter tenure means paying higher EMIs, it also means a reduction in interest cost. Hence, having a shorter tenure will enable you to pay off your loan faster.
Longer tenure means more interest
For example, 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 would be around Rs 24,000, while the EMI for an 8-year car loan would be around Rs 14,000, which is Rs. That is almost half of what you would have to pay in 4 years of tenure. The interest paid on a 4-year car loan comes out to around Rs 1.83 lakh, while the interest paid on an 8-year car loan comes out to around Rs 3.81 lakh, which is more than double the interest paid in 4 years.
Generally, people opt for a longer tenure so that they get extra time to repay the loan, however, it also involves high interest expense and additional financial burden. Keep in mind, the longer the car-loan tenure you opt for, the higher the interest expense you will incur. Therefore, experts suggest that the borrower should avoid taking loans for a longer period to avoid high interest rates.
Another point to consider is that as compared to shorter loan tenures, the interest rates are higher on longer tenures. Lenders usually charge a higher interest rate of around 50 basis points on car loans for longer tenures. Industry experts say that this is a way for banks/lenders to offset the additional credit risk that they are taking on the borrower.
Average usage period of the car
Another thing to note is that the average usage period of the car is usually 5-6 years, after which it is either sold or given to the old dealer. Experts say that the tenure of the long term loan becomes a hassle as the car owner has to continue to repay the outstanding loan even after selling the car. Also, car makers usually do not offer 8 years of warranty, so there will be heavy maintenance charges after the first few years of buying the car. High maintenance charges along with EMIs can become a huge financial burden for you.
Experts say that even though most people dream of buying a car, they are a depreciable asset, which borrowers should keep in mind. So, be careful while choosing a car loan. Check the interest rate as well as processing fee, prepayment charges and other car loan charges. Additionally, with a good credit score, a borrower can negotiate with the lender for better rates and waiver of charges.
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