If borrowers can manage the EMIs, lenders can choose shorter tenures. While a shorter-term contributes to higher EMI, the interest costs will reduce. You can pay back the debt faster for a shorter tenure. Top Benefits of Car Loan with Shorter Loan Tenure You Should Know About.
Many lenders currently provide car loans for up to seven or eight years of maximum tenure. For eg, private banks such as Axis Bank and government banks such as State Bank of India provide eight years of longer tenures on car loans.
Factors which determine why you shouldn’t apply for a long car-loan tenure:
Growing interest and financial pressure
The longer the car loan period, the greater the interest payoff would be, as illustrated in the above. It is the key factor a borrower should stop pursuing long-term loans.
As the typical usage span of a vehicle is not more than five years until the seller first selling to second-hand users, the long-term debt commitment would be a daunting challenge as the borrower must have to pay the unpaid car loan even after 5 years completion. Also, a car manufacturer offers no eight-year contract, implying that within the first 3-5 years after the purchase there would be high maintenance costs. The rising operating costs associated with the EMI will also contribute to a severe financial strain for you.
Higher interest rates for a longer term of loans
The other aspect that plays against a long-standing auto financing is that borrowers usually have a higher long-term debt interest rate to make up for the borrower’s collateral risk banks. You can pay 50 basis points more interest than a three-year car loan over a longer period.
Do not purchase a car that is not feasible
This is very likely that you would prefer a longer tenure of car loans to reach a better lower EMI. It may mean it you seek to acquire a vehicle you can’t manage with the existing salary and insurance budget first. The strategy for longer car loans can be changed in the long run, especially because you pay much more than the actual cost of the vehicle. For a fact, a vehicle is a diminishable asset. In the long term, however, as you deal, you can earn no returns.
Also, Check – Factors to Consider while Financing for a Car Loan This Festive Season
Avoid getting car loans with a fixed rate
For lenders, flat-rate schemes on car loans are deceptive because the effective cost is far higher than the reported interest rate. The interest sum is charged in the case of a fixed rate system for the whole loan term of the initial key loan period.
Opt for the balance reduction option when applying for a loan car as each EMI consists of a principal and a paying interest portion, which is measured at the end of each month on the remaining key number.
Remember the scenario, when the value of the car loan is Rs 10 lakh, the interest rate is 10% and the term for the flat rate is five years. You incur an EMI of Rs 25,000 in the flat-rate system, and the gross interest outgoing is Rs 5 lakh. However, you must pay an EMI of Rs 21,247 for the reduction balance process, and the overall interest cost is Rs 2,74 lakh. This comparable example reveals that, as opposed to the reduction balance system, you pay a lot more interest with the flat-process.
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