How to Choose the Right Personal Loan Tenure?

Relying only on your salary, especially to make big purchases or deal with a financial emergency, can be challenging. During such a time, a personal loan can be a simple, easy and straightforward solution. If you are planning to borrow, it is important to focus on the interest rate and EMI. Apart from these, the loan tenure is another aspect that should be carefully considered, as it can significantly influence the cost of borrowing.

A short tenure reduces the overall cost of the loan, as you pay higher EMIs but for a shorter period of time. A longer tenure, on the other hand, may make the EMI easier to pay, but you would have to do that for a longer time.

So, what makes a loan tenure the right one? How do you choose which tenure would suit you more? And how do you find out how the tenure will impact the EMI? If you are looking for answers to these questions and more, you are in the right place. Read on to know all about a personal loan tenure.

Understanding a Personal Loan Tenure

First things first, there is no ‘ideal’ personal loan tenure. When you take a loan, you repay it in instalments. Simply put, to repay the loan, the principal amount and the interest are broken down, allowing you to pay back in parts. These small parts, called Equated Monthly Instalment or EMI, make up the amount you pay on a monthly basis.

Depending on the tenure you choose, the loan amount gets divided. Let’s take a look at the table below to understand how tenure affects your EMI.

Suppose you have taken a ₹5 lakh loan at an interest rate of 12.5%. This is how the EMIs will be across tenures. Do pay attention to the effect on interest.

The table clearly shows that if you borrow ₹5 lakh at the same interest rate, a 2-year or 24-month tenure results in a higher instalment in comparison to a 5-year or 60-month tenure. However, a longer tenure means you remain in debt for longer and end up paying much more interest.

Short Term Vs Long Term: How to Choose the Right Personal Loan Tenure?

It may be tempting to choose the longest tenure because it offers the lowest EMI, or the shorter one as it is quite affordable overall; however, when deciding the tenure, you need to factor in several aspects and then come to the most financially sensible option.

Here are 6 things you must keep in mind when picking the loan tenure.

1. Create a monthly budget (and stick to it)

Take out some time for this. Carefully and honestly calculate how much you can comfortably set aside for the new EMI. List your earnings and expenses (unplanned expenses too) and analyse your repayment capacity.

If you are self-employed or your income is not fixed, don't calculate affordability based on your best earning month. The idea is to not overburden yourself.

2. Understand the EMI breakdown.

Your instalments are a combination of the principal amount and the interest. A shorter tenure will come with lower interest but will increase the EMI. A longer tenure means lower EMI, but you will have to pay much more interest.

3. Use a personal loan calculator.

To get a fair estimate of how different tenures impact a loan, use a personal loan calculator. This free online tool can be helpful in making the right decision.

4. Factor in your current liabilities

Unfortunately, your loan repayment doesn't happen in isolation. If you already have a home loan, car loan, credit card dues or other EMIs, adding another large repayment can put pressure on your finances. It is therefore crucial to choose the right repayment amount and pick one that you can comfortably pay.

5. Check prepayment and foreclosure terms.

Prepaying your loan is an option if you feel you have the required surplus funds. However, do keep in mind that all lenders charge a prepayment/ foreclosure fee. Check the same before you lock the deal, as such charges can affect the actual savings from early repayment.

Tip: Some banks/ financial companies reduce/ waive the prepayment fee once a set number of EMIs have been paid. Make sure to check the same with your loan provider.

Short Term Vs Long Term Personal Loan Tenure: Which Is Better?

As different borrowers have different needs and preferences, there is no one-size-fits-all approach that can be followed. The following comparison table may, however, be helpful in deciding what works best for you.

Still confused? Here's what you can do. Choosing a very high or a very low tenure can both prove to be stressful. The key is to find the right balance. Chalk out your budget, use the loan EMI calculator, determine a comfortable EMI and then go ahead with the shortest tenure that remains comfortably affordable.

Remember, the aim of taking a personal loan is to solve a financial need without creating unnecessary pressure later. The JioFinance app allows you to compare the available loan amount, interest rate, tenure options, EMI and applicable charges based on your own repayment capacity. Download the app today for all this and more.