Whatever the reason for your need for funds, a personal loan is ideal in all circumstances. They are unsecured, have a simple application process, and can be used for a variety of purposes. This loan is typically used to cover medical expenses, child education fees, home renovations, or to throw lavish wedding parties. However, when applying for this loan, have you ever considered what the ideal payback period should be? The repayment period has a significant impact on your budget. Here are some of the reasons why most people advocate for a longer tenure.
What are the advantages of a personal loan with a longer repayment period?
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Sizeable Loan Amount
You may be familiar with the term debt-to-income (DTI) ratio. It offers insight to your lender on how much of your monthly income goes toward debt repayment. If the total EMI is higher, your application will be denied. Remember that extending your personal loan repayment term results in a lower EMI, which reduces your DTI ratio. As a result, the likelihood of securing a higher sum of money through loan increases.
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Lower EMI
As previously stated, the longer your repayment period, the lower the EMI burden on your pocket. The personal loan interest component and principal outstanding in a long-term loan are spread out over many years. With a pocket-friendly EMI, you can better manage your finances and allocate a portion of your income to investments that will yield a higher return than what you are paying to the lender.
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Lower default chances
You might know that a longer repayment period results in lower monthly debt obligations that are easier to manage. Furthermore, the lender lets you use a personal loan EMI calculator to determine your affordability. It means that by experimenting with different loan amounts, interest rates, and payback periods, you can figure out the maximum loan amount whose EMI can be easily paid off with your monthly income.
Also Read: What is Defaulting on Loan? -
Manage other liabilities
The lower EMI frees up a substantial amount of money. You can set aside a portion of your monthly income for an emergency fund. And, if a financial crisis occurs, such as a job loss, a medical emergency, or a temporary loss in business, you can use the money in the reserve to cover necessary expenses.
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Builds credit
One of the many factors that contribute to your overall credit score is credit length. If you have bad credit, it is advised that you extend your repayment term and pay your EMIs on time, without delay or skipping. It will aid in strengthening your credit history and the improvement of your credit score.
When is the best time to apply for a personal loan with a longer repayment period?
There are two scenarios in which taking out a long-term personal loan in India is a wise decision.
- If you have a low income and the EMI for a shorter term consumes a larger portion of your monthly income, you may opt for a longer term.
- If you have multiple debt obligations and are applying for a personal loan to consolidate all of your existing high-interest loans, it is best to apply for a loan with a longer term to keep your EMI within your budget.
What are the disadvantages of extending the term of your personal loan?
Although longer repayment terms have numerous advantages, you must not overlook the drawbacks. Before proceeding, review the following table.
| Parameters | Repayment Period |
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| 1 Year | 2 Years | 3 Years | 4 Years | 5 Years |
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| Loan amount | Rs 4,50,000 | Rs 4,50,000 | Rs 4,50,000 | Rs 4,50,000 | Rs 4,50,000 |
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| Interest rate | 13% | 13% | 13% | 13% | 13% |
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| EMI | Rs 40,193 | Rs 21,394 | Rs 15,162 | Rs 12,072 | Rs 10,239 |
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| Interest payable | Rs 32,313 | Rs 63,452 | Rs 95,842 | Rs 1,29,474 | Rs 1,64,333 |
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| Total payable | Rs 4,82,313 | Rs 5,13,452 | Rs 5,45,842 | Rs 5,79,474 | Rs 6,14,333 |
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As per the above table, if you apply for a Rs 4,50,000 personal loan and the lender charges 13% interest on your profile, a 5-year tenure would make your EMI affordable at Rs 10,239. If the repayment period is one year, the EMI is much higher at Rs 40,193.
However, when looking at the interest payable, you will be surprised to see the difference between the interest payable for one year and five years. Extending your repayment period increases the cost of your loan. As you can see, the total interest payable over five years is Rs 1,64,333, whereas it is only Rs 32,313 over one year.
To conclude
A personal loan is only a few clicks away. It enables you to deal with any financial crisis with ease. However, the decision to choose a personal loan repayment period should be based solely on your budget. Short repayment terms are ideal if you have a high income and no responsibilities. But if you have multiple debts and various family responsibilities, a longer repayment period is preferable. However, remember that the longer the tenure the more will be the interest pay-out. So, make sure to strike a balance between the EMI and the tenure.
