Purchasing a home or a car is one of the most significant financial decisions one can make, and many people finance these purchases with a loan. While taking out a loan, the borrower must make numerous selections, such as the EMI option to select, the length of the loan, and so on.
Car loans are typically offered for a maximum of 7 to 8 years by lenders. SBI, for example, offers car loans with a 7-year repayment period.
Even though lenders now offer longer terms, borrowers should choose shorter terms after considering the EMIs when taking out a car loan.
With a shorter term, you may end up paying higher EMIs. Although paying more EMIs for a shorter term means paying less interest, it also means lower interest charges. As a result, a shorter term will enable you to repay your loan sooner.
People usually choose a longer-term to give themselves more time to pay off their debt, but this comes with a higher interest rate and a greater financial burden. Keep in mind that the longer the term of your car loan, the greater your interest costs will be.
As a result, experts recommend that one of the key reasons why a borrower should avoid taking out a long loan is to avoid paying more interest.
Another factor to consider is that the interest rates charged on longer loan terms are greater than those charged on shorter loan terms.
On a car loan with longer-term, lenders often charge a higher interest rate of roughly 50 basis points. This is a means for banks and lenders to pay for the increased credit risk they are placing on the borrower.
Another thing to consider is that an automobile’s average usage period is 5-6 years, after which it is either sold or given to a used car dealer. Long-term loan terms are inconvenient since the automobile owner must continue to repay the outstanding debt on the car even after it is sold.
Furthermore, because car manufacturers rarely provide an 8-year warranty, there will be significant maintenance costs after the first few years of ownership. The extra maintenance fees, combined with the EMI, could put a strain on your finances.
Even though most people dream of owning a car, it is a depreciating asset that borrowers should be aware of. As a result, be cautious while taking out a car loan.
Check for processing costs, pre-payment penalties, and other fees related to the car loan, in addition to the interest rate. Furthermore, a borrower with a good credit score can negotiate with the lender for lower rates and fee waivers.
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