Why should you choose longer tenure on your personal loans?
Your EMI amount and the total interest cost depend on the tenure you choose for your personal loan. While shorter loan tenures leads to lower interest cost, opting for longer tenures will reduce your EMI burden, increase the loan eligibility and reduce your chances of default. For more details on the merits and demerits of choosing longer repayment tenure on a personal loan, read below:
Merits of Choosing Longer Tenure on Personal Loans
Helps in reducing EMI
Applicants availing personal loans for longer tenures pay lower EMIs. Having lower monthly payments allow them to accommodate their planned as well as unplanned expenses and make monthly contributions towards achieving their crucial financial goals. It also decreases their risk of making late payments or defaulting on their personal loans.
Increases the chances of availing higher loan amount
EMI/NMI ratio is one of the major parameters used by lenders for determining their applicant’s loan repayment capacity. Lenders usually prefer sanctioning personal loans to applicants having their total debt obligations, including the EMI of the proposed personal loan, within 50-55% of their net monthly salary.
As longer tenure reduces the EMI, borrowers exceeding the above-mentioned limit can avail personal loans for longer tenures to reduce their EMI/NMI ratio and thereby, increase their likelihood of securing personal loan for higher loan amount.
Those planning to avail personal loans in the near future should consider using a personal loan EMI calculator. This calculator will help them calculate their proposed loan EMIs and assess their EMI affordability and optimum loan tenure before making a loan application.
Higher probability of making on-time loan payments
Lower EMIs reduce the stress on a borrower’s personal finances through higher monthly surpluses. This helps in reducing the probability of EMI defaults during the periods of financial exigencies. Paying loan EMIs by their due dates offer an added benefit to borrowers. It helps them build or improve their credit scores and improve their eligibility for availing loan or credit card in future.
More options for loan applicants
Individuals choosing longer tenures for servicing their personal loans can choose from a wide range of lenders as most banks and NBFCs offer tenures ranging from 1 to 5 years on their personal loans. Only a handful of lenders offer personal loans for tenures of less than 1 year.
Demerits of Choosing Longer Tenure on Personal Loans
Higher interest cost
Individuals availing personal loans for longer tenures pay higher interest amounts due to interest compounding for a longer period. Hence, longer the personal loan tenure, the higher would be the interest cost for borrowers.
Those having lower loan eligibility due to their restricted repayment capacity can avail personal loans at longer tenures and can consider making prepayment as their surplus increases with the increase in their income.
As per RBI guidelines, lenders cannot impose prepayment/foreclosure charges on floating rate personal loans. However, lenders can levy these penalties on the part-prepayment or foreclosure of their fixed rate personal loans. Some banks and NBFCs may additionally limit borrowers from prepaying or foreclosing their personal loans until a pre-determined number of EMIs are paid.
Therefore, prospective borrowers should look into the prepayment and foreclosure charges charged by various lenders and apply for personal loan with the lender that levies no or lower prepayment charges and/or have fewer prepayment restrictions.
Lower eligibility for availing additional loans
Availing personal loans with longer tenures can block the repayment capacity of a borrower for a longer time. As lenders consider the existing loan repayment of applicants while evaluating their loan applications, availing personal loans for longer tenures can negatively affect their eligibility for availing additional loans.
