5 Tips for Choosing the Right Tenure for a Personal Loan

A personal loan is an ideal credit choice for anyone who is looking for a short term, unsecured loan urgently. Besides, there is no exclusion on the purpose of the loan, and you do not need a guarantor or collateral to avail it.

However, a personal loan attracts a high rate of interest which can vary anywhere between 11% to 22% p.a.; and in some cases, it can be as high as 26%. It is for this very reason Personal Loans repayments should be planned in advance before applying for the loan. You must carefully evaluate the loan tenure and EMIs so as to ensure a smooth loan repayment during the loan period.

A single default in loan repayment is as bad as multiple later payments as both will adversely hit your score and ruin the credit history.

In a vast majority of cases, Personal Loans are offered for a period ranging from 12 to 60 months. However, in some cases, the maximum personal loan tenure can be extended up to 84 months at the discretion of the lender, depending on the loan amount, and the credit history of the borrower.

Choosing the Right Tenure for a Personal Loan

In an ideal world, I would suggest you to pay off your Personal Loan in the minimum possible tenure of 12 months. However, since we live in an imperfect arena, here are a few aspects that need your due diligence before choosing the tenure for your Personal Loan.

1. Take into Account Your Monthly Budget

When it comes to appropriating an amount which you can set aside month after month, without fail, the first thing that you need to do is to factor in your fixed and variable expenses in a month. Subtract these expenses from your monthly income, and on the basis of what remains, you can choose an apt amount that you can conveniently shell out towards your Personal Loan EMI. Based on this amount, you must carry out calculation to reach at the ideal loan tenure you require for the loan repayment. You need to be realistic in your approach.

2. Contemplate Existing Liabilities

Speaking of budgeting, take into account other existing loans and credit bills, including your home loan EMI, car loan EMI, utility and credit card monthly bills, etc. These commitments along with an additional instalment of Personal Loan can put a significant restraint on your finances. So think over your monthly outflows before you apply for the loan.

3. Evaluate Your Financial Prospects

Whether you are a business owner, a self-employed professional or a salaried individual if you are anticipating a hike in your income in the foreseeable future, you may opt for an EMI, which can be easily accommodated with the revised income. Of course, you will have to burn both ends until the increased income actually starts flowing in. But, it will help you pay off your loan at a faster rate, later on, thereby helping you save on the overall personal loan interest rate.

At this point, you can also consider any secondary sources of income, such as money earned through a rental property, dividends earned, etc., or the income of your spouse. The goal here is clear, the higher the financial prospects, the greater the EMI and the smaller the tenure.

4. Check Your Repayment Ability

Yes, opting for a shorter tenure is ideal; however, if your income isn’t high enough or you already have other financial commitments to take care of, then you may need a Personal Loan with a prolonged tenure so that your EMIs are spread over an extended period of time. Not only will this help you manage your personal finances better, but it will also ensure that you pay your EMIs more efficiently.

You must assess the available options with your bank, be it a PNB Personal Loan or the one from HDFC. Your banker will help you find the best deal according to your profile.

5. Make Use of an EMI Calculator

Loans involve complicated mathematics for many, which cannot be done at the tip of your fingers. To clearly understand what a Personal Loan entails, your ideal EMI outgo, the overall interest you will be paying and a tenure which will help you save as much interest as possible, you will need the assistance of a personal loan EMI calculator. Thankfully, you can use MyMoneyMantra EMI calculator and do the required Maths in a fraction of a few seconds and take an informed decision.

In all, it always helps to do your homework before availing a Personal Loan. You can contact loan aggregators and compare various loans online to decide on the best EMI as well as Tenure. This will help you reach a decision, which will be truly practical.