Jul 23, 2020Personal Loan
Being an unsecured loan type that comes with flexible loan tenure, personal loans offer solutions for a variety of financial issues. With no end-use restriction on the use of loan funds, personal loan acts as a savior in the time of need.
Compared to other loan categories, personal loans are a bit expensive and allow you to choose the EMI amount and loan tenure based on your repayment capacities. But, it doesn't mean you can pick any loan tenure, like going for a longer tenure to have lower EMIs or choosing a shorter tenure with a high EMI amount.
Both situations are not ideal, as both can impact your finances. A shorter tenure means that you will have to make an allocation in your budget for repayments. On the other hand, a longer tenure translates to a higher average cost of borrowing.
Therefore, it is important to choose the right personal loan tenure period, so that you get the intended benefits out of the loan taken.
Must Read: Different Types of Personal Loans in India
Apart from the cost benefits, setting the right tenure helps you to pay your EMIs comfortably, without putting stress on your finances. Following are some of the other benefits:
The most preferred way for determining the right personal loan tenure and EMI amount are by analyzing your spending and savings rate.
Make a list of your monthly commitments and how much you are able to save before taking the loan. Also, take into consideration, if you have any existing liabilities and its duration.
Based on your saving and expenditure rate, you can decide on your EMI loan amount and loan tenure.
Following the 50/30/20 thumb rule, where 50% of your income goes towards meeting expenses (fixed & variable), 30% is for meeting non-essential expenses and rest 20% for savings and debt repayment, will help you chart a proper repayment plan.
The amount you wish to borrow through personal loan has a huge influence on determining the loan tenure. For small loan amounts, like borrowing 2-3 times your monthly income, then you should aim for shorter loan tenure, as choosing a longer tenure increases your interest cost.
Similarly, borrowing a large sum of money, equivalent to 6-8 times of your monthly income, then you should go for a longer tenure. Choosing a short tenure puts a strain on your financials, and may lead to default, which is more dangerous.
The interest rate offered on personal loans depends a lot on your credit score and it also determines your eligibility for personal loan.
Apart from the credit score, the loan tenure selected by you also influences the interest rate. Generally, shorter loan tenure attracts a lower interest rate and longer loan tenure attracts higher interest payments.
Based on your credit score, if you are offered a lower rate of interest, then you should select shorter tenure and avoid paying more on interest.
And, if you have a poor credit score, it is ideal for you to select a longer tenure, as shorter tenure with higher interest payment will work against you and negatively impact your finances. Selecting a longer tenure also helps to improve your credit score that will help you in your future loan applications.
You can use various loan tenure combinations with the proposed loan amount and arrive at loan tenure, which is best suited for you.
While doing budgeting or calculating your personal loan EMI, you should consider any due salary hike or increments in the near future. Then, you can set a higher EMI amount and reduce your loan tenure.
Paying-off higher EMI will be an issue initially or until the hike happens, but in the long run, your total interest outgo will be far lower.
If you are still confused about deciding the right personal loan tenure, you can use the personal loan EMI calculator. An easy-to-access free online tool that helps you in calculating the EMI amount and deciding on the loan tenure. Use a different tenure combination to calculate the ideal EMI amount.
A personal loan EMI calculator provides you with detailed information about total interest outgo and total payment (interest + principal) to be made during the loan tenure.
Personal loans are the most easily accessible loan type and the approval process is also less stringent compared to other loan categories. However, it doesn't mean, you will opt for a relaxed repayment tenure or a very short tenure compared to the size of your loan amount.
A wrong loan tenure significantly hurts your finances and becomes a burden. In an event of default, it has far-reaching consequences as it will restrict your financial accessibility for a long time.
Therefore, analyze all the pros and cons of different loan tenure and read the personal loan documents carefully before fixing your loan tenure. And, whatever repayment tenure you opt for, adhere to the repayment timelines strictly to avoid any unnecessary inconvenience.