Auto loan: Should you opt for a shorter or longer term?

Even though having a shorter term means paying higher EMIs, it also means lower interest charges.

Buying a house or a car is one of the big financial decisions one makes, and many usually get these expenses financed by taking out a loan. That said, while taking a loan, the borrower has to make many decisions such as which EMI option to choose, which tenure to opt for, etc.

Generally, lenders offer car loans for a maximum term of 7 to 8 years. For example, SBI offers car loans for a term of 7 years. Experts say that when opting for a car loan, even though lenders are now offering longer terms, borrowers should opt for shorter terms, after taking EMIs into consideration.

Having a shorter tenure could lead to paying higher EMI amounts. However, while having a shorter term means paying higher EMIs, it also means lower interest charges. Therefore, having a shorter lifespan will allow you to pay off your loan sooner.

For example, if you take a car loan of Rs 10 lakh with an interest rate of 8.5%, the EMI for a 4-year car loan will be around Rs 24,000, while the EMI for a 8 year car loan will be around Rs. 14,000 which is almost half of what you will have to pay during the 4 years term. Interest paid on a 4-year car loan is around Rs 1.83 lakh, while interest paid on an 8-year car loan is around Rs 3.81 lakh, more than double that. that you would have paid with a 4-year loan. mandate.

Usually, people opt for a longer term to get that extra time to pay off the debt, but it also comes with higher interest expenses and additional finance burden. Keep in mind that the longer the auto loan term you choose, the higher the interest expense will be for you. Therefore, experts suggest that avoiding higher interest rates is one of the main reasons why a borrower should avoid going for a long term loan.

Another point to consider is that, compared to shorter loan terms, the interest rates charged on longer terms are higher. Lenders generally charge a higher interest rate of around 50 basis points, on the auto loan for a longer term. Industry experts say this is how banks and lenders compensate for the extra credit risk they take on the borrower.

Another point to note is that the average useful life of a car is usually 5 to 6 years, after which it is either sold or given to a second-hand dealer. Experts point out that having a long-term loan then becomes a problem because the car owner will have to continue paying off the outstanding loan on the car even after selling it. Along with this, car manufacturers usually don’t offer 8-year warranties, therefore, there will be heavy maintenance costs after the first few years of car purchase. The higher maintenance fees along with the EMI could become a heavy financial burden for you.

Experts say that while most dream of buying a car, it is a depreciating asset, something borrowers should keep in mind. Therefore, be careful when opting for a car loan. In addition to the interest rate, also check the processing fees, prepayment charges, and other fees associated with the car loan. Also, with a good credit rating, a borrower can negotiate with the lender for better rates and waiver of fees.

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