Planning to take a car loan in new year? Find out if you should opt for a shorter or longer tenure


Why does the tenure of a loan need to be discussed? It is so because different tenure leads to different interest outgo. Buying a house or a car is among the big financial decisions that one takes, and usually gets financed by taking a loan. Experts say while opting for such loans, it is better to understand it in and out, to get the best interest rates.

For instance, with car loans, most lenders offer a maximum tenure of 7-8 years, such as SBI offers car loans for a longer tenure of 7 years. But should you opt for such a long tenure for your car loan? Industry experts say borrowers should opt for shorter tenures, while opting for a car loan, after taking into consideration the EMIs.

One might argue that having a shorter tenure leads to paying higher EMI amounts, however, it also reduces the interest costs. Hence, having a shorter tenure will allow you to pay off your loan sooner.

For example, if you take a loan of Rs 8 lakh with an interest rate of 9.5 per cent, the EMI for an 8-year car loan will be Rs 11,929 whereas the EMI for a 4-year car loan will be Rs 20,099, which is almost double of what you will have to pay in the 8-year tenure.

The interest paid on a 4-year car loan comes to Rs 1.64 lakh, whereas the interest paid comes to Rs 3.45 lakhs on an 8-year car loan, which is double what you would have paid with a 4-year tenure.

Usually, people are seen to opt for the longer tenure, hoping to get extra time to pay off the debt, but experts point out that having a longer tenure also includes higher interest outgo and added financial burden.

As explained above, by opting for a longer car-loan tenure, the interest outgo will be higher for you. This is why a borrower should avoid opting for a long loan tenure.

Banks and financial lenders generally charge a higher interest rate of around 50 bps (basis points) higher on the car loan for a longer tenure. Experts say this is the lender’s way to compensate for the additional credit risk that the banks are taking on the borrower.

Therefore, it is another point to consider – interest rates charged on longer tenures are higher as compared to shorter loan tenures.

Additionally, experts say as borrowers one should also think long term. For instance, usually, the average usage period of a car is 5-6 years, after which it is sold to a second-hand user. If you opt for a loan with a longer tenure, it then becomes a hassle for you as you will have to continue to repay the outstanding loan on the car even after selling it.