Personal loans are one of the most sought-after financial tools that can help you meet various financial needs. The funds come with an unrestricted end use, allowing you to use the proceeds for consolidating debts, funding major expenses like marriage, education etc., buying properties or equipment or even meeting emergency medical needs.
One crucial aspect to consider when taking a personal loan is the loan tenure as it directly affects your equated monthly instalments (EMIs). This determines your repayment schedule. The choice of personal loan tenure can significantly impact your monthly financial obligations and the overall cost of borrowing. Let’s obtain a deeper understanding of personal loan tenure and how it affects your EMIs, allowing you to make an informed decision about your personal loan borrowing.
What is Personal Loan Tenure?
Personal loan tenure refers to the duration for which you commit to repaying the borrowed amount. It is the timeframe within which you are expected to repay the entire loan along with the interest to the lender. Personal loan tenures typically range from 1 to 5 years. However, some lenders might offer longer tenures depending on the loan amount and their policies.
How to Choose the Right Personal Loan Tenure?
If you are wondering how to choose the right personal loan tenure, then you should consider the following important factors:
Monthly Budget: You need to assess your monthly income and expenditures to determine how much you can comfortably allocate towards loan repayments. A longer tenure might lead to lower EMIs, which could be more manageable within your budget.
Interest Rate: The interest rate on your personal loan impacts the total cost of borrowing. A higher interest rate might lead to larger interest payments over the loan tenure, directly influencing your decision on the loan tenure.
Total Interest Cost: Longer tenures may lead to lower EMIs but might result in higher total interest payments over the loan term. Conversely, shorter tenures might lead to higher EMIs but lower overall interest costs.
Financial Goals: Consider your short-term and long-term financial goals. If you intend to clear the debt quickly, a shorter tenure might be more suitable. However, if you need flexibility and lower monthly commitments, a longer tenure might be preferred.
Prepayment Option: Check if the lender allows prepayment or foreclosure of the loan. Some lenders impose prepayment penalties which could influence your decision to opt for a shorter or longer tenure.
While we understood the various factors affecting personal loan tenures, let’s see the impact of personal loan tenure on your EMI.
Effect of Longer Personal Loan Tenure and Effect on EMI
A longer personal loan tenure results in lower EMIs but could lead to higher overall interest costs. Let's understand the effect of longer personal loan tenure on EMIs with a simple example:
Suppose, you borrow Rs. 5 lakhs at an interest rate of 10% for a tenure of 3 years.
EMI Calculation: EMI = (P r (1 + r)^n) / ((1 + r)^n - 1)
Where,
P = Loan amount = Rs. 5,00,000
r = Monthly interest rate = Annual interest rate / 12 = 10% / 12 = 0.833% per month
n = Number of EMIs = 3 * 12 = 36
Thus,
EMI = (5,00,000 0.00833 (1 + 0.00833)^36) / ((1 + 0.00833)^36 - 1)
= Rs. 16,134
Total interest over 3 years will be Rs. 80,809.
Effect of Shorter Personal Loan Tenure and Effect on EMI
A shorter personal loan tenure results in higher EMIs but could lead to lower overall interest costs. Continuing the above example, let's consider you borrowed Rs. 5 lakhs for 2 years instead of 3 years.
EMI Calculation: P = Rs. 5,00,000 r = 10% / 12 = 0.833% n = 2 * 12 = 24
EMI = (5,00,000 0.00833 (1 + 0.00833)^24) / ((1 + 0.00833)^24 - 1)
= Rs. 23,072
As we can understand from the above examples, a longer tenure resulted in an EMI of Rs. 16,134 as against Rs. 23,072 in the case of shorter tenure. However, the total interest during the longer tenure was Rs. 80,809 as against Rs. 53,739 in the case of shorter tenure. Both the EMI amount and the total interest outflow become important parameters while selecting your personal loan tenure.
Summing Up
Selecting the right personal loan tenure involves a delicate balance between managing your monthly cash flow and minimising the total interest cost. A longer tenure results in lower EMIs which might be more suitable for those seeking manageable monthly payments. However, it comes with the trade-off of higher total interest payments. On the other hand, a shorter tenure leads to higher EMIs but can help you save on overall interest costs. It's essential to evaluate your financial circumstances, goals and repayment capabilities to determine the tenure that aligns with your needs.
For affordable and unsecured personal finance at attractive interest rates, visit Tata Capital today. Tata Capital's personal loan process is extremely convenient with a digital application process and easy-to-meet eligibility criteria.
FAQs
Q1. What is personal loan tenure?
Personal loan tenure refers to the duration within which you commit to repaying the borrowed amount. It is the timeframe within which you are expected to repay the entire loan, along with the interest, to the lender.
Q2. How does personal loan tenure affect my monthly payments?
Personal loan tenure directly affects your monthly payments. Longer tenures result in lower EMIs, making them more manageable to repay. While shorter tenures lead to higher EMIs but result in faster repayment of your loan obligations.
Q3. How does personal loan tenure affect my total interest cost?
The impact of personal loan tenure is significant on your total interest costs and loan repayments. A longer personal loan tenure might lead to lower EMIs but could result in higher total interest costs over the loan term. Shorter tenures might lead to higher EMIs but lower overall interest costs.
Q4. What factors should I consider when choosing a personal loan tenure?
Before deciding on your personal loan tenure, you need to consider various factors to make an informed decision. These include your monthly budget, interest rate, total interest cost, financial goals and whether the lender allows prepayment or foreclosure. You should also check the applicable penal costs for foreclosure or prepayment of the loan. These factors will help you determine the most suitable tenure.
Q5. How can I save money on my personal loan?
If you plan smartly, you can save significantly on your personal loan. To save money on your personal loan, you can consider opting for a shorter tenure, making prepayments when possible and comparing offers from different lenders to secure the lowest interest rate.
05 February 2024
6 mins read
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