Buying a new car on a loan is the most common practice but it could also be a trap if you are not financially educated. Over 75% of people buy new cars on loans. It is an accepted and common practice. However, most people don’t understand the banking principles behind the entire loan process. That is why it becomes crucial to inform yourselves about the repayment method of any loan in general, and car loan in particular. With this post, you shall be able to make a more informed decision. Read the details here.
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Car Loan Trap
This video comes from Mycarhelpline. com on YouTube. The YouTuber offers great insights into the lending industry. When people generally go to buy a car on loan, they often end up taking the EMI tenure for the longest possible duration. Firstly, that is a terrible blunder. You will end up paying interest which would be even more than the principle itself. That is not a smart move since you are already investing in a depreciating asset. On top of that, there are maintenance and running costs associated with vehicles too.
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Thereafter, most people think that they would foreclose the loan when they get a bonus and lumpsum amount from somewhere. But that is, again, a grave mistake. What happens during the loan repayment cycle is that the banks direct the major component of your EMIs toward the interest during the first few years. Hence, you would have already paid a large chunk of the interest applicable for a loan of 7 years within the first couple of years. If you decide to foreclose the loan after, let’s say, the fourth year, there is not much benefit to you. The same is the case with partial payments.
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How to Avoid This?
There are some distinct steps you could take to avoid such traps. This doesn’t have anything to do with the EMI repayment, but your own discipline. You must be patient enough to understand that the EMI amount should be kept as high as you can pay for a lower duration. Secondly, the basic rule is that the EMI amount should not be more than 20% of your monthly take-home salary. In fact, the YouTuber even throws in an interesting fact. He says that you should ideally not buy a car which is priced more than your yearly salary. Finally, you should not buy a car due to societal pressure. If your old car is working, keep using it. If there are minor issues, invest in the car to fix them. All these factors would ensure that you are making an informed decision.
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