What Should Be the Tenure of Your Personal Loan
New Delhi : A personal loan is a huge financial responsibility that requires a lot of thought, especially the tenure of the personal loan. The tenure is the period of repayment of the loan. It is a significant factor in determining the monthly EMI (Equated Monthly Instalment), total interest outgo, and impact on your financial stability.
But what should be your ideal personal loan tenure? Let’s dive deeper to understand how you can make the right choice.
Why Is Loan Tenure Important?
The tenure of your personal loan determines the duration in which you pay off the amount you borrowed. It impacts two key factors:
Reduction in Monthly EMI
A longer tenure means lower EMIs, making repayment easier on your monthly budget.
Total Interest Outgo
Longer tenures may reduce monthly obligations but also equate to higher overall interest on your loan.
Types of Personal Loans
Based on loan tenure, you can roughly categorize personal loans into two categories. Here’s a closer look:
Short-Term Loans
Short-term loans have tenure of 1 to 3 years.
Advantages of Short-Term Loans
1. Interest cost is low: Since the tenure is less, the total interest payable is much less.
2. Debt-Free Soon: It helps you repay your loan in a hurry, which frees you from financial risks sooner.
3. Better for Smaller Loan Amounts: If your loan amount is on the lower side, short-term tenure helps wrap up payments efficiently.
Challenges of Short-Term Loans
1. Higher Monthly EMIs: The shorter the repayment table, the higher the EMIs, and these can strain your budget if not properly planned.
Long-Term Loans
Personal loans with tenures of over 4 years are categorized as long-term loans.
Advantages of Long-Term Loans
1. Reduced Monthly EMIs: By extending the loan tenure, you get lower EMIs, making it easier for you to manage your budget and account for other expenses.
2. More Freedom: If your expenditure is lower each month, you have that much more freedom to save, invest, or meet other financial obligations.
Challenges of Long-Term Loans
1. Higher Interest Outgo: A longer repayment period means paying a higher total interest.
2. Extended Financial Obligation: You are linked to the loan for an extended period, which in the long term may seem like a liability.
How to Decide on Personal Loan Tenure?
Here is how you can choose the suitable tenure for your personal loan:
Your Average Monthly Income and Expenses
Evaluate your monthly income, spending, and savings. With a higher disposable income, you can afford a shorter tenure with higher EMIs, resulting in lesser interest paid. But if your budget is tight, a longer term with lower EMIs would be easier to handle.
Loan Amount
Your loan amount has a huge impact on your tenure. Longer repayment tenures also help in keeping EMI affordable for higher loan amounts. Smaller loans, by contrast, can be paid off quickly over shorter tenures.
Interest Rates
Always compare the interest rates your lender offers. When the rates are low, it may be worth it to opt for a shorter term. On the other hand, higher interest rates might push you toward longer tenures to manage EMIs.
Future Financial Goals
Consider your long-term financial plans. If you’re planning significant expenses like buying a house, starting a business, or saving for your children’s education, ensure the loan doesn’t interfere with these goals.
Prepayment Options
Personal loans from many financial institutions don’t charge pre-closure charges, lowering your interest liability significantly. If you are expecting an increase in income flow, like a bonus or an increment, you can choose a longer tenure and prepay the loan later to save on interest.
Determining a Suitable Tenure for You
The key to finding the right loan tenure lies in understanding your financial capacity. Here’s a simple formula to help:
1. Use online EMI calculators to compute your EMI.
2. Keep the EMI within 30-40% of your monthly income.
3. Evaluate the total interest payout for various tenures.
4. Select a tenure that provides the best in terms of affordability and cost-effectiveness.
Should You Choose the Shortest Tenure
You might be tempted to pick the shortest tenure to minimize payments on interests, though that’s not always the ideal option. A high EMI can affect your cash flow and lead to financial strain and missed payments. Strike a balance between a tenure that keeps EMIs manageable and minimizes the total interest.
Conclusion
Finding the right tenure for your personal loan is a balancing act. Evaluate your current state of finance, your goals in the future, and the total cost of the loan. A short tenure will save on interest but will increase the amount of EMI to be paid.While a long-term term will offer you breathing room, it will cost you more in time.
The best loan tenure is one that suits your financial comfort and makes sense for your long-term objectives. Take the time to evaluate your options and use EMI calculators. A well-planned decision will make sure your personal loan serves your financial needs rather than turn into a burden.
