3 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 simply focused on the EMI amount and opted for a longer tenure on auto loans. When he later approached his financial expert, they explained the interest outgo on such a tenure would be higher compared to the credit with shorter tenure. Nowadays, lenders offer credit for a maximum duration of seven to eight years. Experts suggest, if you can afford higher EMIs, then select shorter tenure 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 the average life of the four-wheeler 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 completion of five years. Today, even manufacturers do not provide eight years warranty. This means there will be high maintenance costs after the initial three to five years. This higher maintenance costs along with EMIs can cause financial burden.
• High-interest rates: The other factor that expert’s advice not to opt for 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. This means you are purchasing a vehicle that you cannot afford based on your current income and financial profile. Car loan in India which runs for long-term can backfire since you end up paying way more than the actual cost of the four-wheeler. Moreover, four-wheelers are depreciating assets, and in the long run you will not receive any returns by selling it off.

Flat rates on four-wheeler loans –

Flat rates are a scam as they turn out to be higher when implemented than the quoted ones. As for the flat rate method, the interest amount applies to the principal amount throughout the tenure. Go for reducing balance method when it comes to auto loans since EMIs consists of components like principal amount and interest rates. The interest gets calculated on the principal balance amount at the end of every month.

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