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Personal loans are unsecured loans offered by banks, NBFCs and Fintech lending companies to creditworthy individuals. Tenures on these loans start from 1 year and stretch up to 5 years. The question of whether to choose a short tenure (1-2 years) or a long tenure (4-5 years) has often baffled customers. In this article, we observe the pros and cons of choosing long repayment tenure.
They offer flexible end use and repayment tenure that usually varies from a year to 5 years. The question to choose a short tenure (6 to 2 years) or long tenure (3 to 5 years) is debatable. Though almost all the lenders offer the privilege to choose the loan tenure as per your repayment ability, it is necessary to be careful while choosing the right tenure.
Long term loans offer huge loan amounts and as such have stringent eligibility guidelines. However, these criteria differ with different lending banks. Listed below are some of the most common criteria that apply to almost all long-term loans.
The best thing about opting for longer repayment tenure is that you can significantly reduce your monthly repayment burden. If you have tight monthly financial commitments, it is advisable that you go in for a long tenure (note that personal loan tenures stretch up to 5 years).
Let’s cite an example to support this claim – taking a personal loan of Rs 4 lakh on a 1-year tenure at an interest rate of 12% p.a. (reducing balance basis) will require you to pay almost Rs 36,000 per month. On the contrary, the same loan amount over a 5-year tenure on the same interest rate translates to an EMI of Rs 8,900.
Before sanctioning you the desired loan amount, the lenders check your monthly income and other criteria to ensure that you will be able to repay the loan without any delay. When you choose a longer tenure, your EMI gets minimized and the lender easily sanctions a higher loan amount as the chances of defaulting on your loan payment decreases.
Customers are given the option to pre-close their loan before their tenure matures, usually at a nominal fee of 1-2% of the remaining outstanding loan balance. Opting for a long tenure will enable you to save more every month and pre-close your loan before your tenure ends.
Many lenders offer top-up loans after consumers complete a certain period in their tenure. Usually, the minimum repayment period that must be completed to qualify for a top-up is 9 months. Top-ups are offered to individuals who have a clean repayment history and a good credit score.
Your credit score is an extremely important parameter that lenders examine when you apply for credit. If your score is slightly damaged, opting for a long tenure and making timely and consistent repayments every month can work well to improve your credit score significantly.
A longer tenure can give you more breathing space while making your monthly repayments and enable you to opt for a higher loan amount. The fact that you’re opting for a long tenure, you can as well go in for a higher loan amount and perhaps pre-close your loan as soon as you can. This strategy particularly works well if you wish to consolidate your debt.
The interest of a personal loan is calculated in a compounded way. It means that a longer tenure will attract more interest payment. Personal loans are generally expensive in nature and accumulating interest for a longer period will make you pay out much more than you have actually borrowed.
A long term personal loan will keep you under the debt for a long time frame. Being under debt for a long time may make you feel the debt-burdened. You will always need to be disciplined with your financial responsibilities for a long span of time.
The loan eligibility of a person is calculated on the repayment capacity. As long as you service a loan, your loan eligibility for new loans is lessened as you have fixed obligation of your ongoing loan. The lenders do check that the total payable of every month should not be more than 50% of your net monthly income. Hence, an ongoing loan kills your opportunity for availing a new or bigger loan.
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