Everything You Need to Know About Personal Loan Tenures
When you borrow from a lender, you promise to repay the amount over some time. The time you pay off the rent is called your loan tenure. For example, if you take a large home loan, the repayment cycle may run for a decade or two. The borrower can’t pay more than a certain amount every month. Every borrower can pay only a fraction of their income as EMI for a loan. When you take out a personal loan for the long term, you lock yourself into that lender’s financial services for the next several years or decades. However, long tenures can also have many advantages, including smaller EMIs. Thus, tenure is something that you would like to consider carefully before making a decision. Keep reading to learn more about personal loan tenure and the various factors affecting it.
What is a Personal Loan Tenure?
Personal loan tenure is the length of time most lenders require you to repay your loan. In most cases, you must pay back the loan for a certain period, and you can repay it in one of two ways:
- Fixed rate: The lender sets the interest rate for the loan so that it will remain the same for the entire loan period. In other words, at the end of the loan, you will have to pay back the same amount you borrowed plus interest.
- Adjustable Rate: This rate varies based on the market rates and is fixed for the first few years, but then it increases yearly by a specific amount. It can benefit people who don’t want to make principal payments on their loans and would like to pay them back over a longer period. However, you may want to pay back the loan after a while, so you will have to pay interest on top of the original amount.
How Personal Loan Tenure Work
When you take out a personal loan, the lender lends you money and collects interest on your loan. That part is so clear to most. But there is little awareness when it comes to the part where the applicant has to decide on the personal loan tenure. Yes, an applicant has a say in how long the repayment of the loan will run for. However, it also depends on the paying capacity of the applicant. The bank looks at the paying capacity before deciding the tenure of the loan.
The formula used for determining tenure is complicated. But it can be said that the lender considers a fraction of your disposable income when working out the tenure. Say, for example, one earns Rs 25,000 per month. In this case, the EMI paying capacity will be limited to the early single digits. It is because the applicant will have other expenses as well. Therefore, how much you earn has a bearing on your loan tenure.
Factors Affecting Personal Loan Tenure
Here are the four things that have a bearing on personal loan tenure.
1) Amount of loan
If the amount you borrowed from the lender is large and your paying capacity is modest, you will have no option but to take a long-term loan. Depending on the amount, it will spread the EMIs or equated monthly instalments of your loan over decades and make repayment easier for you. However, this has certain disadvantages. For example, you will end up paying more interest than if it was a short-term loan. Given that the principal amount will be repaid over a long period, you will continue paying the interest. In such cases, applicants must choose the variable interest rate model to benefit from the decrease in interest rates of loans over a long period.
Therefore, you can choose a longer tenure if you have financial constraints and limited repayment bandwidth. But if you have the means to pay relatively quickly, you must take that option. It will save you money and allow you to take a second loan sooner. That way, you can consider making new investments too.
2) Interest rate
A fixed-rate loan may sound like a good idea, but it may be inadvisable for most people. It is so because even though interest rates may be high initially, they may eventually decrease. If you choose a fixed-interest model, you will have to continue paying a high-interest rate throughout the tenure of the loan. You will have to pay a lot more money in the form of interest. It will be in addition to the amount that you originally borrowed.
On the other hand, a variable loan rate is usually lower at the beginning but may increase over time. In such cases, you will end up paying more money. Therefore, you must look at the interest rate trend. It would help you decide which of these options you want to choose. It can make quite a difference to your repayment plan.
3) Earning
As stated briefly, the amount you earn will determine your loan tenure. If your earnings are low, the lender would want you to take a long-term loan. It will eliminate the possibility of default, given the EMIs will be small and easy to pay.
If you have a large income, you can also avail of a short-term loan as you have the paying capacity to service your EMIs on time every month.
4) Age
You’re more likely to receive a long-term payment option if you’re young. However, if you are nearing retirement, things will be different. The bank would point out that your source of regular income is likely to end with your retirement. With no regular income, paying EMIs can become tricky. Therefore, banks are unwilling to give long-term loans to those nearing retirement and offer them to the young instead.
Conclusion
If you are taking a personal loan, you must consider a short payment tenure. It will ensure that you don’t pay more than necessary as interest. However, these loans are also available with a long-term plan. You can repay them over a long period. The length of the loan will determine how much you will have to pay back. You can either choose to pay it off quickly. Or you can make the tenure long with an adjustable rate.
But the best option is looking at lenders with flexible loan programs. You can consider reaching out to Piramal Finance for such options. As a leading financial institution, they have designed some of the most borrower-friendly loan programs in the industry.