The Financial Implications of Personal Loan Tenure

At some point, most of us find ourselves needing a loan. When you approach a bank or financial institution for a loan, you are often presented with various loan tenure options for repayment. This is where the question arises: which loan tenure is the right choice for you?
In this blog, we will share the concept of loan tenure, the maximum durations available, and the key factors to consider before deciding on a repayment term. We will also weigh the pros and cons of long loan tenures to help you make an informed decision. Let us begin by understanding what loan tenure means.
What Is Personal Loan Tenure?
Personal loan tenure is the period for which the borrower agrees to repay the amount along with the interest to the lender. The tenure would vary from 12 months to 60 months in general, but certain financial institutions may offer more extended terms in specific cases. So, it becomes quite essential to select an appropriate loan tenure because that will directly impact your Equated Monthly Installments and total interest outgo.
Determination of Maximum Loan Tenure Based on Parameters
Factors determining the maximum loan tenure for personal loans include the following:
1. Lender Policies
Every lender has a unique policy that decides the maximum loan tenure they can offer. Banks might set their personal loan tenure to five years, but fintech platforms are changing the lending scenario as many offer tenure options suited to the different needs of the borrower.
2. Loan Amount
Higher loan amounts often require longer tenures to make monthly EMIs affordable. A borrower who is seeking a much higher loan amount may prefer a tenure of five years that reduces the EMI strain, even if it means paying more interest overall.
3. Borrower’s Age:
Lenders consider lending money for longer tenures to younger applicants than to older borrowers who reach the age for retirement soon because he has less number of years to work, and hence, the interest will be calculated over a comparatively smaller period only.
4. Income Stability
A steady source of income can make the lender willing to provide longer tenures as it ensures repayment ability over a longer period.
5. Credit Profile
Borrowers with good credit scores and repayment history are generally given longer loan tenures because lenders consider them low-risk applicants.
Benefits and Drawbacks of Longer Loan Tenure
Benefits:
1. Lower Monthly EMIs:
A longer tenure spreads the repayment burden, reducing the monthly EMI amount and making it easier to manage within your budget.
2. Enhanced Loan Eligibility:
You can go for a more extended tenure so that your possibility of getting eligible for loans will be increased because the lenders believe that a lower EMI is a better indicator of repayment.
3. Greater Flexibility:
Greater tenure will provide you with more flexibility in the management of finances, especially during periods of fluctuating income.
Disadvantages:
1. Higher Interest Costs:
The total interest that is payable for the loan will be high, and though the EMI is very small for a longer-term loan, it will be costly.
2. Extended Financial Commitment:
Longer tenures mean you’re tied to the debt for a more extended period, and so it can also prevent you from engaging in other financial responsibilities.
How to Decide on the Right Loan Tenure?
You can follow these suggestions to decide on the right loan tenure:
1. Evaluate Your Financial Goals:
Determine whether you want to prioritize lower EMIs or minimize total interest costs. Shorter tenures save on interest but require higher monthly payments.
2. Know EMI Affordability:
You must use online EMI calculators to calculate tenures. You will know how EMIs vary with tenure. Ensure the EMI aligns with your income and other financial obligations.
3. Future Financial Plans:
If you anticipate increased expenses like home purchases or children’s education, a shorter tenure might be better for clearing your debt faster.
4. Compare Lender Options:
The lender can design a tenure according to the person’s need, such that the amount borrowed by that person can result in proper affordability and flexibility in repaying the loan.
Impact of Loan Tenure on EMI and Interest
The tenure of a loan has a significant impact on both the EMI (Equated Monthly Installment) and the total interest paid over the loan’s life. Loans taken for a short term would have high EMI, but the total outgo in the form of interest would be lower. A longer tenure keeps monthly EMI lower, thereby reducing this short-term financial stress, but with total interest paid, the cost of the loan would also rise.
For instance, while it lowers the monthly EMI by spreading repayments over a longer period, in a five-year tenure, more interest is added than in a two-year tenure. The borrowers need to strike a fine balance between the affordability of EMIs and their interest cost minimization objective. For this, they can rely on EMI calculators to make the right choice.
Maximum Tenure Available from Various Lenders
1. Banks
Traditional banks typically offer personal loans with a maximum tenure of five years.
2. NBFCs
The tenures of loans from NBFCs can be anywhere between 12 to 84 months. It depends on the eligibility of the borrower.
3. Fintech Platforms
Fintech platforms are customer-centric. Depending upon the repayment capacity and preference of the individual, tenure options are available.
Ways to Manage a Long-Term Personal Loan
Here are the tips to manage a long-term personal loan.
1. Prepayment Planning:
Make lump sum payments whenever possible to reduce the outstanding principal and shorten the loan tenure.
2. Track Interest Rates:
Stay updated on interest rate trends and explore refinancing options if rates drop significantly during your tenure.
3. Create an Emergency Fund
Build a safety net to ensure uninterrupted EMI payments during unforeseen circumstances like job loss or medical emergencies.
4. Automate EMIs
Set up auto-debit for your EMIs to avoid missed payments and late fees.
Conclusion
Choosing the right personal loan tenure is a critical step toward financial stability. While longer tenures offer lower EMIs, they increase the total interest cost. Balancing affordability with overall financial health is key. Platforms like Stashfin simplify this process by offering transparent policies, helping you make the best decisions for your financial future. You may need a short-term loan for quick expenses or a longer tenure to manage larger amounts; Stashfin’s innovative solutions ensure a seamless borrowing journey.
Before finalizing your loan app, evaluate your income, expenses, and future financial goals to select a tenure that aligns with your needs. With informed choices and responsible borrowing, you can leverage personal loans as a powerful financial tool to achieve your dreams.
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