3 Factors to Consider When Choosing the Ideal Personal Loan Repayment Tenure

In the recent past, Personal Loans have gained unprecedented unpopularity. Not only because they are readily available, and are offered at competitive interest rates, but also because the tendency to spend on lifestyle expenses has considerably increased. While the convenience provided by Personal Loans cannot be denied, it is crucial for you, as a borrower to understand the implications of the loan repayment tenure. After all, for every additional year in your tenure, you ought to pay other interest which can easily mount to being almost equal to or sometimes, even higher than the principal amount.

To simply give you a clearer picture of the impact of personal loan repayment tenure, let us consider a loan of Rs. 5 Lakhs, obtained at an interest of 15% per annum.

If you take this loan for four years, you will be required to pay an equated monthly instalment (EMI) of Rs. 13,915. Here, your total interest payable will be Rs. 1,67,938, which will bring the full payment at Rs. 6,67,938.

On the other hand, if you take the same loan with a tenure of 6 years, your EMI will fall to Rs. 10,573. However, your total interest payable will rise considerably to Rs. 2,61,220.

Then again, taking the same loan for an 8-year duration will lead you to pay an interest of Rs. 3,61,380, which is exceedingly high, for a principal amount of Rs. 5 Lakhs.

Since most Personal Loans are often offered for a tenure of up to 5 years, you will not be required to pay an interest that is higher than the loan amount itself, but that does not necessarily mean you shouldn’t be careful enough to pick a tenure that is both, cost-effective as well as conveniently manageable for you.

Here are some aspects which you must consider, in order to choose an ideal loan repayment tenure.

1. Loan Amount

Your loan amount is what will largely determine your EMI. Hence, a more substantial loan amount will mean a significantly higher EMI, while a smaller amount will make way for a smaller EMI. It shouldn’t come as a surprise that a very high EMI can put a strain on your finances, and even impact your quality of life.

A golden thumb rule for picking the loan amount is that your EMI should not exceed 40% of your income. Hence, if you make Rs. 60,000 a month, your EMI must be limited to Rs. 24,000 a month. This implies that if you are getting a loan at 15% interest rate, your amount can be in the range of Rs. 8 to 10 Lakhs. This, however, is only applicable if your tenure is five years. If you wish to restrict the tenure to 3 years of time, you may have to limit the amount to Rs. 6 to 7 Lakhs.

Then again, if you wish to opt for a small loan, which is, say three times your monthly income, it is best to choose for a short tenure of up to 2 years. This will help you on saving on the interest outgo. On the other hand, if you want a credit worth four times or more of your monthly revenues, you must opt for a longer tenure. The comparatively smaller EMIs will help you in repaying the amount efficiently, without putting any strain on your personal finances.

2. Interest Rate

Personal Loan interest rates usually fall in the range of 11% to 22% depending on the lending institution as well as the credit history of the borrower.

More often than not, lenders take a close look at your repayment history, before finalising on the interest that you will be required to pay towards your loan. The math here is simple – the better your credit history, the lower will be the interest rate on your mortgage, and vice-versa. This is in line with the potential risk that a lender bears when it offers you a credit.

If you are offered a low-interest rate, it may prove to be best for you to pick a short tenure and pay off your loan conveniently. On the other hand, if the rate on your loan is higher than expected, you should opt for a relatively long tenure. This will help you repay the loan consistently, without feeling the pinch of high monthly payments. That being said, you must be prepared to shell out some excess money towards the interest.

Here, it’s also crucial for you to note that longer tenures often call for relatively higher rates of interest.

3. Monthly Budget

As mentioned earlier, giving up less than 40% of your monthly income is considered fine from a financial standpoint, as it leaves you with over 60% of your income that can be used for day-to-day expenses and other obligations. If, however, your expenses are higher than usual and exceed 60% of the monthly revenues, you should opt for a longer tenure.

The extended time period will ensure a relatively smaller EMI, thereby leaving you with ample money to manage your personal expenses without much trouble. Of course, this doesn’t mean that you take an extensively long tenure, as in such a case, you will be at the losing end given the high amount of interest that you will end up paying.

We hope that now you understand the importance of the aspects mentioned above and also that you will be somewhat careful while picking the ideal personal loan tenure.