Getting Long Term Car Loan or Finance | Wise Decision?

Buying a new car is a common practice nowadays and each one of us wants to save every penny we can on our car’s deal. Some of us ask for discounts and for those who get their car financed, try to save each and every bit in their loan TnCs. Today’s featured is about a very interesting topic where we will uncover the truth behind one of the most common topic in the car the finance arena. Long term car loan – this is one of the most popular schemes in the automotive market right now but is it really worth it? We uncover the pros and cons of long term car loans in this one! Make sure you read it till the very end.

What is a long term car loan?

Before elaborating on the long-term car loan, we would like you to revisit a piece of information which you possibly already know about. Car loans are basically an arrangement where you get your car financed from a bank or any other loan provider and repay the amount in the form of monthly instalments. The loan amounts vary from person to person depending upon their income, credit score and many other factors.

Similar is the case with the instalment term. Car loans in India start with a time period of 2 years and can go up to 7 years! As said earlier it totally depends upon you that how much loan will you get and how long you can take to repay. Talking about a long term car loan, tenure of anything above 5 years is said to be a long term car loan. The calculation is simple if you go for a long term repayment tenure you will have lower EMIs but is it worth to have? Let’s find out!

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Long Term Car Loan | Pros & Cons

Finally getting to the point where today’s article was meant to take you. What are the pros and cons of an extended-term car loan?

Pros

• Buying an expensive car
  

  

  If you choose a finance scheme for over 6 years, you can easily buy an expensive car of your choice! The math is simple your car’s cost gets divided into the number of instalments that you need to pay and if the instalments are more, your monthly load will be less. You might land into a similar EMI if you go for 2-year finance on a hatchback or 4-year finance on a sedan (not based on exact calculations)!

• Small EMIs
  

  

  As we said earlier, the math is simple! If you apply for a loan of say 5Lac rupees and opt for a 6-year repayment term, then the EMI you pay will be lesser than what you have paid if you have applied for the same loan a shorter period of time. This will help you own a car in an affordable way where your car’s EMI won’t form a significant spend in your income!

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Cons

• High Interest Rates
  

  

  Lower EMIs might look attractive, but they come with higher interest rates! Yes, if you go for a long term car loan, the interest rate will be higher than what the provider would have charged in the case of a short term car loan. This proves to be a disadvantage as you end up paying a larger sum of money than what you would have paid in case of a short term loan. Now, it is totally up to you that if you want to keep your EMIs short or want to save on the amount that you would pay as an interest on your principle.

• Severe Depreciation
  

  

  You already know that the new car you have bought comes with depreciating value. Your car’s value can reduce up to 20% in a year depending upon how you use it. Leaving the amount of appreciation aside, just image how much value would the car possess once you finish your EMIs in the long term plan. There will be a time for sure when your car’s resale value would get lower than the amount you are left to repay! This doesn’t sound good right?

• Negative Equity / Underwater Situation
  

  

  This wonderful graphic by GoAuto is self-explanatory! For those who still didn’t get it, negative equity is a situation where your car’s net worth comes down to be lesser than what you still owe to the loan provider! This can prove to be disastrous in case your vehicle is totalled or stolen. No doubt you have the best insurance policy, but the insurer will provide the amount mentioned in the policy (IDV) not the amount you still owe to the loan provider! It’s you who will pay the additional amount to the loan provider.

• Being the actual owner
  

  

  You are not the actual owner of the car till you repay the full loan amount remember that! Would you like your most loved possession to be owned by a bank for long? The long term car loans benefit the banks more because of the factors we have already mentioned above. If you want to save more on car loans and gain the complete ownership of your vehicle while it is still in its best conditions, go for a short span car loan.

• Risk Factors
  

  

  This is the most interesting one! Read it carefully. Suppose your new car comes with. a warranty of 5 years and you get it financed against a loan for 7-8 years. There are two major risk factors. the first one lies on the car’s end where your car might demand a major repair work and the warranty is already gone. Imagine the hardship of paying the EMIs and the repair costs at the same time! The other risk factor lies at the human end where natural disasters can lead to financial losses. The COVID-19 situation is a perfect example. Many people have lost their jobs or are facing pay cuts. It’s better to pay off the loans within a period that you can plan and predict!

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This was all about the pros and cons of the long term car loans in India. The pros and cons remain almost the same no matter what country you live in. For those wondering if there is any way out from the negative equity situation, yes there is definitely a way out. If you want me to write. a separate article on that, please leave a comment below. Also, don’t forget to share this article with your friends so that they get to decide wisely while going for a car loan next time!

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