Three reasons why short tenures are useful while applying for car loans

Mumbai-based Sudarshan Sinha works in the marketing department of a textile company. He purchased his dream vehicle through a car loan. The on-road price was INR 12 lakh, and he paid INR two lakh as down payment and ended up taking the credit for INR 10 lakh at a competitive interest rate. The tenure that he opted for the same was eight years. Sinha decided on the duration without paying attention to the interest he needs to pay.

He focused on the EMI amount and opted for a longer tenure on car finance. When he later approached his financial expert, they explained that the interest outgo on such a term would be higher than the credit with shorter tenure. Nowadays, lenders offer credit for a maximum duration of seven to eight years. Experts suggest that if you can afford higher EMIs, select a shorter term as it results in lower interest costs. A shorter tenure also helps you pay off the credit sooner.

Here are factors that prove why you should avoid higher tenure –

High-interest payments: As mentioned above, lengthy the mandate, higher the interest outgo. It is one of the primary reasons to avoid higher duration. Considering that the four-wheeler’s average life is not more than five years, the long-term commitment becomes a hassle since the buyer continues repaying the outstanding amount on the four-wheeler even after completing five years.

Today, even manufacturers do not provide eight years warranty. It means there will be high maintenance costs after the initial three to five years. This higher maintenance costs, along with EMIs, can cause a financial burden.

High-interest rates: The other factor that experts advise not to opt for a longer duration on car loan finance is the increased interest rates. Lenders typically do so for the additional credit risks lenders take on the borrowers. You may end up paying 50 basis-points more interest on the credit for a longer tenure than a three-year term.

Unaffordable four-wheeler: The reason more and more people opt for high tenure is lower EMIs. It means you are purchasing a vehicle that you cannot afford based on your current income and financial profile. A car loan that runs for long-term can backfire since you pay way more than the four-wheeler’s actual cost. Moreover, four-wheelers are depreciating assets, and in the long run, you will not receive any returns by selling it off.

While you apply for car loan, be careful as they are additional charges involved like processing fees, prepayment charges, and other associated costs.

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