[GTO]

As someone who hates ANY kind of loans & EMIs, I was just when I saw this. The Oriental Bank of Commerce now offers car loans for up to TEN YEARS


Source

IMHO, if you need a 10 year loan to buy a car, you simply cannot afford that model. Better to go with a car that's priced lower. Plus, it can bring all kinds of trouble. God forbid, what if your income levels drop? Or there is a family emergency? Can you foresee your finances for the coming 10 years? Not even Nostradamus could. What if you can no longer afford to pay the EMI? Do you honestly want to sacrifice your daily lifestyle because of that depreciating asset sitting in your garage?

What's worse, after a couple of years, you will be "upside down" on your loan. Meaning, the amount of loan outstanding will be more than the car's worth. Imagine if, in such a situation, your car is stolen, burnt to the ground or has any other kind of total loss. You will lose your car AND have to pay the bank out of pocket.

Odds are, you'll be bored of your car or want an upgrade far earlier than the loan duration. Guys like me who hold onto cars for long are rare; the average car upgrade cycle in India is ~5 years.

Don't miss the fact that your 10 lakh car will easily cost you 16 - 17 lakhs, due to the interest on your long-term car loan.

Making things even worse is the fact that some banks charge a higher interest rate for long-term loans. So, it's a triple-whammy for you.

My advice:

- Buy a model that you can realistically afford. Again, if you need a 10-year loan to buy a car, you simply cannot afford it. Hard fact. IMHO, if you take a car loan, don't go over 5 years, come what may.

OR

- Keep using your existing car for more time & enjoy the EMI-free life. Related thread (ARTICLE: YOUR 5 year old car : Keep, Upgrade or Swap?).

OR

- Buy a pre-worshipped car .

Related Discussions

1. Ideal car loan duration (Your preferred car loan duration)

2. SBI Smart Loan (The Cheap Loan or the Smart Loan - SBI Advantage Car Loan)

3. Loan against FD (Car Loan against Fixed Deposits)

[Hayek]

Agree fully. The only guys for whom a 10 year car loan makes sense are businessmen - who could use a secured car loan as a cheaper source of financing once they have exhausted secured credit limits for their business, and the loan against property window. Certainly does not make sense for anyone in the salaried class.

[SmartCat]

Highlights:

- It is a floating rate loan - that makes it even worse if interest rates rise. Or wonderful if interest rates fall!

- This 10 year loan is a mix of (car loan + personal loan). That's because car value will eventually be lower than outstanding principal, since cars are depreciating assets. Since this loan has a personal loan component, interest rates are likely to be much higher than car loans.

- Banks have a bad habit of charging interest first and not reducing the principal (by much). That is, interest component is likely to be 90% of EMI initially. Now this is terrible if you want to sell your car and foreclose the loan before 10 years. Eg: Even after 6 or 7 years, you might have to pay, say 60 to 70% of the car's initial value to foreclose

[reignofchaos]

3 years is the ideal car loan period, 5 is max. Anything more is financial suicide. A car is a depreciating asset. So it makes zero sense to take such a long term car loan.

[gkveda]

I am sure this will increase the head-ache for bank recovery team if the loan taker raises his hands due to some accident or any other mishap and car loses its value. Simply, the loan taker says, if you want, you can seize my car. I will not repay the balance

There may be some ways to recover. My worry is, the bank is creating avenues for people to become unethical

[ashis89]

Sorry for going off-topic.

I was surprised to know this. Recent trend in car sales show that the car ownership period is reducing and people tend to change cars every 5-7 years. PSU banks are going against such trends to offer longer period loans. Or, maybe they are trying to up-sell the buyers and provoke them to get expensive cars.

Further OT, defaults on auto loans in US are rising alarmingly. Maybe Indian banks to just trying to catch up.

[blackwasp]

Thanks to easy finance options, credit cards, loan availability, most millennials today live on EMIs. Sad to say this, but schemes like these are solely targeted at newly salaried, or people in my age group (22-27 year olds).

While most of us here would think twice about the total expense over the 10 years, most people would rather want the car now, than save money and get the car, say after 3-4 years.

While loans are a good financial tool, getting into a debt trap is very easy these days. Most of my friends today have taken out loans for 7-15 lakhs after just 2-3 years on a job for cars. Me, I bought a used M800 after saving for about 10 months.

Slightly OT, but just look at the amazon page on things available on EMI today. That is grim.

[aadya]

I am not a fan of long term loan for depreciating assets. Any loan other than home loan should not be for more than 5 years, as predicting and maintaining the cash flow for such long durations is very difficult. It would feel painful to keep paying for a car which would cost a fraction of initial cost after about 5-6 years of age.

Having said that very long term loans like this can be useful for some people and I was in similar situation some time back. Decent stable cash flow but some heavy commitments for short term, time to buy a car(essential) and EMI for 3 or 5 years slightly difficult to manage.

Take an ultra long term car loan which reduces the emi to manageable limit. When other commitments are cleared up prepay the loan or restructure it for a shorter term. This is possible only if there is part payment/foreclosure options. Much easier if we have good long term relationshif with a PSU bank.

[saket77]

Another worry for the economy. I would say that with so many avenues available for credit now, there are lot more chances of default. The banks are already dealing with mammoth NPA figures. I have major qualms that the next bad thing coming for the Indian economy will be bad loans in huge proportions. Credit is available so easily now, even for online purchases and without proper due diligence that I have a genuine fear of economy going downwards in the longer term due to this reason. The consumption may seem to temporarily increase because of the easy financing, but consumption and repaying the loan are two very difference aspects of the same thing.

I know so many people in my immediate circle who are driving out new cars from showroom ever so frequently because of the ease of financing without giving a thought about the consistency of current monthly income in future. Only because one is able to afford the EMIs now, doesn't mean that they would be able to do it in future. A proper self assessment is also needed before taking the loan plunge.

[ani_meher]

10 year loan on a depreciating asset (rather liability) is a horrible financial decision. Unless you are getting it extremely cheap, committing your finances for next 10 years just to afford the hot vehicle today is an extremely bad decision. I am sure many will be suckered into buying top versions of vehicles that they can't afford/don't require just because 10 year EMIs look manageable.

The fact that Banks charge interest first and not reducing the principal is simply because of a mathematical formula. If your loan is 10 lakh with 1% per month interest, then for first month your interest is Rs.10,000. Any amount over and above this 10k is subtracted from outstanding. Suppose you pay 15k EMI.

So first month, outstanding is 10 lakh.

15k EMI = 10k interest + 5k principal repayment.

Next month: outstanding is 9lakh 95thousand, so

15k EMI = 9950 interest + 5050 principal repayment.
And so on.

People pay minuscule amount over and above interest to keep the EMIs as low as possible, and hence the decrease in loan outstanding is very gradual. If we pay more than the EMI, or if simply pay once every four weeks rather than once every month, the loan gets cleared faster due to accelerated principal reduction.

That said, taking a loan is profitable only when the asset in which you are investing appreciates with a rate of return more than the loan's interest rate. In case of car, it is a losing proposition.

[xcentrk]

I knew this day would come. Why not? Even for personal loans the tenure is getting extended and it's no surprise for car loan.

I despise EMI, especially longer ones. Bought my car with loan on 2014 and paid it off by mid of 2018. Now I can hold on to this car until it gives any major trouble and live car-EMI free. And even for my HL, I chose 10 year as tenure as anything above 8+ for HL is too long for me.

But this 10 year tenure for car loan, is absolutely a trap for newbies. I believe this is aimed mainly for people who don't have enough money to buy luxury vehicles but with such long tenure, they can go buy it. Think about it, with longer tenure, EMI tend to reduce and this attract unsuspected car buyer, who doesn't aware of the kind of debt trap he is getting into.

I can see a trend lately. People start with a budget of 5L and end up buying car way above their intended budget because of loans and low EMI. One of my friend bought Creta instead of Ecosport, and end up taking personal loan(3L) to cover down payment of 5L and Car loan for 7 years with 16k EMI.

If he would have gone with Ecosport, the 2L which he had would have covered down payment and EMI will be 15k for 5 years. I mean this is some high level dumb thing IMO, all because of the way EMI(s) are pushed down the throat of common man.

[Sheel]

Presenting another side [though not in a favor of 10 years but maybe 5-7 max].

For someone like me who has a fluctuating turnover, I prefer to have an EMI which won't bother me if for that financial year my turnover is less than expected.

So, just to stay on the safe side, the year things go up, I would foreclose my loan prematurely.

As someone who hates ANY kind of loans & EMIs

Agree here. In my 35 years of age, its my first car loan and zero loans for my Dad [he won't get any now as he is a senior citizen] and everything got were cash-down.

I prefer to keep 6 months EMI in an account which I don't touch, I would hate a bad CIBIL score if I need a loan for work. So, planning right helps.

And yes, buy what you can afford realistically.

[Zappo]

This case actually brings out the woes of the Indian banks and half-baked products they come up with. There are several things wrong here. And I am speaking from the bank's perspective.

This is a floating rate loan. As we all know, under the "spread" mechanism of charging loan rates banks rarely ever take the rates down. They only climb. Now, with all loans, the EMIs are structured such that for most part of the tenure the principal amount reduces in trickles. Now think of the scenario where this bank has extended a ten year loan of 30 lakhs to a guy for buying a car. The guy pays his EMIs diligently for the first 2-3 years. But the rates keep changing and because this is a fixed tenured loan his EMIs keep getting jacked up (to finish the loan in 10 years). Soon he realizes that his burden is increasing day by day beyond what he initially thought it will be and also, the principal due on his car is far higher than what his car is actually worth after 3+ years. What do you think may happen at this stage? He may just renege on his car loan. Its the subprime crisis redux... in the car loan business. Entirely possible though with such strange product offerings being rolled out.

I am suddenly realizing why OBC share prices never go up.

[JoshMachine]

As rightly said by many, people who purchase a depreciating asset for that long (10 yrs in this discussion) should re-think about whether they need to be taking the loan at all, in the first place!

From a banker's perspective, they are just trying to woo the potential customers and supposedly make their lives easy with such a stretched payment term/duration.
And in the bargain, hoping that they will be able to attract those set of customers who perhaps, cannot afford that initial high EMI (with lower duration loans).

Having said this, it cannot be argued that other banks will not follow suit and every other bank will try to fall upon each other trying to outdo the competition.

But from a buyer's perspective, getting into such a lengthy contract will tremendously increase the total cost of ownership (due to the very high interest outgo) making the entire proposition very unprofitable.

[aniyo]

10 years is crazy. I hate car loans, with god's grace I bought both my cars paying upfront.
The first was the Brio, went pre-owned route.
Second was the Nexon which we bought with full upfront payment. No EMI policy was the main reason we did not go for the Creta. The additional outflow did not justify the added benefits of Creta.