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What Should be the Tenure of My Car Loan?

Snapshot: We have compiled a list of some important factors that determine how long your car loan should be.

It’s time to come to terms with your car loan term. Contrary to the popular belief, your decision of opting for auto credit does not rest solely on how EMIs fit into your monthly budget. The total time taken for the repayment of auto loan and the value of the car at the end of the tenure have to be considered as well.  In reality, there is a lot more to what your car loan eligibility calculator tells you.

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Here are some important factors that determine how long your car loan should be:

1. Higher Interest Payments

A longer loan term leads to higher interest burden in terms of finance charges and the car loan interest rate. It is recommended that you opt for a loan period of up to 5 years to ease this burden. Stretching out your payments, with a view of having more disposable cash each month, may backfire. Long-term loans with increased interest would end you up with paying extra money to the bank on the whole.

Interest outgo in a long-term car loan (Auto Loan Amount of Rs. 50 Lakh @ 9.75 % Rate of Interest)

Interest as % of Principal

Tenure of Loan

57%

10 years

91%

15 years

128%

20 years

167%

25 years

2. Short and Long Term Drawbacks

In the above case, a dramatic effect can be attained on the loan tenure by increasing the EMI amount. Say, you have agreed to pay for your premium car @ Rs 48,251 per month over a period of 20 years, at 10%, as per the car loan EMI calculator of your choice. Later on, if your income rises by 8-10% annually, then by adding another 5% to your EMI, you will be in a position to pay off your loan in less than 12 years. A further tightening of the belt, wherein you add 10% every year to your EMI account, would help you pay off the loan in just 9 years and 3 months.

3. Low Resale Valuation

At 5 years, a new-car value would depreciate by 53.5 percent while a 6-year-old car would lose 59.4% of its value. A dealership would find your 5-year-old car more desirable and give you a better resale valuation than the one that's 7 years old. This is because a car that’s travelled more miles would not be an attractive asset for the used-car marketplace. In a nutshell, by taking a lower tenure loan, you can be assured of higher returns on resale.

4. Depreciation of Asset with Use, Wear & Tear, etc.

Once you have taken the delivery of a used or new car, and even before you start paying EMIs and interest, the value of your car starts depreciating.  Depending on the kind of vehicle you own, the principal balance of your auto loan reduces at a much slower rate than the worth of your car. Soon, the money owed to the bank will be much higher than what you would get in return for it, especially if you choose to pay a low down payment, and finance your vehicle purchase in terms of licensing, registration, taxes, vehicle purchase, etc.

5. Alternate Solutions to Long Car Loans

Use your loan calculator to find an affordable price range and the cars that fall in it. You would do well by sticking to the options at the lower range.  Also, although the interest rates for used cars are on the higher side, you may like to invest in a second-hand vehicle rather than a new car. This is because such cars are less expensive, attract shorter loans, have lower payments, etc.

Opt for the auto loan that offers the best possible interest rate at the shortest term. Along with affordable monthly car payments, a good car loan is one that can be paid off years before you believed it would.

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