Introduction
There comes a phase in life when you require more money than you presently have. It could be for the expansion of your business, for meeting medical expenses, paying for higher education or anything else. Today, getting a loan is easier with so many financial institutions lending capital at affordable interest rates. But, repaying a loan is a lengthy process and that’s why the loan tenure is as important as the loan amount, the EMIs and the rates. Here we will discuss the factors that affect the loan tenure and how to figure out the right loan period.
What does Loan Tenure mean?
Loan tenure simply means the duration for which you borrow the money from a lender. Most lenders have a minimum and maximum repayment period, which differs depending upon the type of loan you have applied. Generally, secured loans, where the collateral is involved, offer longer tenures while unsecured loans like personal loans have shorter tenures. There are many factors that have an effect on the loan tenure. These are discussed below.
How different elements of your loan affect the tenure?
Bigger the amount, longer will be the tenure. It’s simple if one person takes a loan for INR 1 lakh and another takes INR 10 lakh at the same rate of interest and say have the same financial capability to pay about INR 10,000 - 15,000 as EMI, the latter would take several years more than the former to clear his/her debt. So, never borrow more than you need or borrow more simply because a bigger loan is easily available. The applicant should first calculate the least amount of capital that he/she needs and apply for the amount making sure that the loan-to-income ratio is within acceptable limits. Experts suggest that all your EMIs clubbed together should not be more than 50 percent of your income.
Bigger the EMIs, shorter the tenure. Supposedly, two people take the same loan amount at the same rate, the person who can’t comfortably afford to pay as much in EMIs as the other will need more number of months to fully repay the loan. That’s why experts suggest paying more in EMIs and reducing the tenure. Those who can’t pay more in EMIs initially should use the rise in the income to increase the EMI amount annually as the years go by.
Though interest rates don’t directly increase or decrease the tenure, they increase the interest amount to be paid, which in turn takes more time to repay. So, if there is a home loan available at 10 percent at one financial institution and 11 percent at another for the same amount, the interest calculated on both at the end of 5 years would be very different. If both the borrowers pay the same amount of EMI, then the person who took the loan at 11 percent will take more months to repay the loan. This is the reason, financial experts always stress upon the need of doing thorough market research and keeping your credit score high to get a loan at the best terms and conditions available. Even a difference of 0.2 percent in the interest rate, can increase or decrease the tenure by a couple of months.
Short-term Loan or Long-term Loan?
Short-term loans are given for a shorter period and have to be repaid to the lender quickly. Short-term loans are meant to take care of emergencies. For example, your credit card, line of credit or personal loans are types of short-term loans where the repayment period could be a few weeks, few months or few years. Because every lender wants maximum returns from the loan, short-term loans levy high interest rates as both the amount and tenure are less as compared to long-term loans like home loans or loan against property. There is another factor that plays a big role in choosing whether a short-term loan works for you or a long-term. So, if you are someone who will retire in another 5-10 years, you should opt for a short-term loan but if you are a youngster with smaller pay package at present but a lot of scope of financial growth in coming future, opt for long-term loans.
Sometimes, it is considered good to keep repaying a loan as it gives you tax benefits but largely loans are seen as a burden that one must get rid of as soon as possible. When you opt for longer tenures, you sign up to pay much more in interest and the percentage of interest paid to that of amount borrowed keeps rising. So, it’s wise to not take more loan than you need, bargain hard with the lender to get better interest rates, and try and give bigger chunks in EMIs, to end the debt sooner.
