The repayment tenure plays a major role in determining your interest cost and EMI of your personal loan. Choosing shorter tenures can reduce overall interest costs whereas selecting longer tenures reduce EMI burdens and thereby, increases personal loan eligibility and reduces the chances of loan default. Here are some advantages and drawbacks of choosing longer repayment tenures for personal loans.
Advantages of Choosing Longer Tenures on Personal Loans
Lower EMIs Provide Flexibility in Handling Your Personal Finance
Choosing longer repayment tenures for personal loans enables prospective borrowers to reduce their EMIs and thereby, reduce their strain on personal finances. Opting for extended tenures also reduces the risk of default during financial emergencies. Timely repayments of EMIs helps in building or improving credit scores, which increases the applicant’s eligibility for availing loans or credit cards in future.
Borrowers with lower EMI obligations can manage both planned and unforeseen expenses while maintaining a surplus to invest in crucial financial goals. However, those sacrificing monthly contributions to unavoidable financial goals for higher EMIs may find themselves availing higher-interest loans in the future to meet those financial objectives.
Increases Chances of Availing Personal Loan of Higher Loan Amount
Lenders assess loan applications based on the applicant’s EMI/NMI ratio, representing the percentage of net monthly income (NMI) used for paying EMIs. Usually, banks and NBFCs favor personal loan applicants whose total debt obligations, including the proposed loan’s EMI, stay below 50-55% of their monthly income. Those surpassing this limit can opt for longer repayment tenures to reduce their EMI/NMI ratio and thereby, increase the chances of loan approval for higher loan amounts.
Prospective personal loan applicants can use online personal loan EMI calculators on lender’s websites or financial marketplaces, prior to the final loan application. The calculator will help you to find the optimal EMI and tenure based on your repayment capacity.
Greater Options for Personal Loan Applicants
Prospective borrowers looking for longer personal loan tenure have a variety of options, as most banks and NBFCs provide schemes with repayment periods ranging from 1 to 5 years. Some lenders also offer personal loan tenures of 6 and 7 years. Only a few banks/NBFCs provide personal loan having repayment tenures below 1 year.
Drawbacks of Opting Longer Tenures on Personal Loans
Longer Tenure Leads to Higher Interest Costs
Opting for longer repayment tenures on personal loans leads to higher interest costs due to the compounding of interest for longer duration. Thus, applicants having restricted repayment capacity may initially choose longer tenures on their proposed loan and then try make prepayments as and when they have higher monthly surpluses.
Notably, the RBI guidelines prohibit part-prepayment or foreclosure fees on personal loans with floating interest rates. However, lenders can levy these charges on fixed-rate personal loans. Some lenders may also restrict prepayment/foreclosure of personal loans until a set number of EMIs are repaid. Thus, comparing prepayment-related fees and restrictions across lenders is crucial for prospective borrowers before finalizing a personal loan application to any lender.
Lower Loan Eligibility in Future
Choosing longer tenures for personal loans would block your repayment capacity for longer durations. Lenders check the applicant’s existing repayment obligations to assess his repayment capacity for the new loans. Thus, opting for longer tenures may reduce your loan amount eligibility for additional loans in the future. To improve personal loan eligibility, borrowers with longer personal loan tenures should consider making prepayments, if possible. However, individuals planning to partially prepay or close their loans should avoid compromising monthly contributions or existing investments for their crucial financial goals, as this might lead them to avail loans at higher interest rates to meet their crucial financial goals or deal with financial emergencies in the future.