Are you planning to take out a car loan at the beginning of the year? Find out if you should opt for a shorter or longer term

You could argue that having a shorter tenure leads to paying higher EMI amounts, but it also reduces interest charges.

Why should the duration of a loan be discussed? This is so because different tenures lead to different outflows of interest. The purchase of a house or a car is one of the major financial decisions that one makes and is generally financed by a loan. Experts say that when opting for such loans, it is better to understand it thoroughly, to get the best interest rates.

For example, with car loans, most lenders offer a maximum term of 7 to 8 years, as SBI offers car loans for a longer term of 7 years. But should you opt for such a long duration for your car loan? Industry experts say borrowers should opt for shorter terms while opting for a car loan after taking EMIs into consideration.

You could argue that having a shorter tenure leads to paying higher EMI amounts, but it also reduces interest charges. Therefore, having a shorter term will allow you to pay off your loan sooner.

For example, if you take a loan of Rs 8 lakh with an interest rate of 9.5%, the EMI for an 8-year car loan will be Rs 11,929 while the EMI for a 4-year car loan years will be Rs 20,099 which is almost double what you will have to pay over the 8-year term. The interest paid on a 4-year car loan is Rs 1.64 lakh, while the interest paid is Rs 3.45 lakh on an 8-year car loan, which is twice what you would have paid with a 4-year term.

Usually, people opt for a longer term, hoping to have more time to pay off the debt, but experts point out that having a longer term also means higher interest expenses and an additional financial burden. As explained above, by opting for a longer car loan term, the interest expense will be higher for you. This is why a borrower should avoid opting for a long term loan.

Banks and financial lenders generally charge a higher interest rate of about 50 basis points (basis points) higher on the car loan for a longer term. Experts say it’s the lender’s way of compensating for the extra credit risk banks take on the borrower. Therefore, this is another point to consider – the interest rates charged on longer terms are higher than on shorter loan terms.

Plus, experts say that as borrowers, you also have to think long-term. For example, the average useful life of a car is usually 5-6 years, after which it is sold to a second-hand user. If you opt for a loan with a longer duration, then it becomes a headache for you because you will have to continue paying off the outstanding loan on the car even after you sell it.

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