Personal loans have become an increasingly popular financial tool for many Indians to meet big-ticket expenses like home renovations, weddings, medical emergencies or even dream vacations. A key factor determining a personal loan's affordability is its tenure - the number of months or years you get to repay the loan amount.
Financial institutions in India typically offer tenure options ranging from 12 months to 60 months (5 years). The tenure you choose impacts the Equated Monthly Instalments (EMIs) and the total interest calculated on the loan. So, evaluating tenure options carefully before taking a personal loan is important.
In this blog, we will discuss the key aspects related to personal loan tenure.
What is a Personal Loan Tenure?
A personal loan's tenure refers to the period within which you have to repay the entire loan amount along with applicable interest to the loan provider.
Tenure is expressed in months—for instance, a ₹5 Lakh personal loan taken for 36 months has a 3-year tenure. Based on the loan tenure, EMIs are calculated, which you pay towards principal and interest each month.
The tenure options on personal loans in India typically range from 1 year to 5 years. Longer tenures spread out the loan repayment over a longer time horizon, thus reducing your EMI amount. Shorter tenures have higher EMI amounts as you repay the loan faster.
Ideal Loan Tenure
Is longer tenure always better when availing of a personal loan? Not necessarily. The ideal loan tenure depends on:
- Your repayment capacity: Based on your income, expenses and existing EMIs, determine the EMI you can comfortably pay each month. Avoid stretching your repayment capacity to the limit.
- Interest rate on loan: Longer tenures mean paying more interest overall. So, if your loan carries a high rate of interest, it is better to opt for a shorter tenure.
- Total interest payable: At very long tenures, the interest component in EMIs is higher. See what tenure range keeps total interest payout within your budget.
- Loan end use: Shorter tenure is advisable for short-term or emergency expenses, while longer tenure makes sense for long-term goals like home renovation.
Ideally, your total loan obligations, including the personal loan EMI, should not exceed 40-50% of your monthly income.
Impact of Loan Tenure on EMIs and Interest Cost
Tenure directly affects the EMI and total interest payable on your personal loan. Hence, one should strike a balance between affordable EMI and total interest payout while deciding on loan tenure. A tenure of 24 to 36 months usually offers this optimal balance for most borrowers.
How to Choose the Right Loan Tenure?
Follow these steps to choose the ideal personal loan tenure for your needs:
1. Assess repayment capacity
Based on your income, expenses and existing loans, evaluate how much EMI you can comfortably afford monthly without compromising on other financial goals.
2. Estimate total interest across tenures
Using the EMI calculator, find out the total interest payable at different tenure options within the minimum-maximum range.
3. Align tenure as per end-use
If taking a loan for higher education, match tenure to the course duration. For home renovation, tenure should not exceed the estimated life of assets being funded.
4. Account for future income rise
If your income is expected to increase in future, you can handle higher EMIs. So, take a shorter tenure to save on interest.
5. Compare prepayment flexibility
Opt for financial institutions that allow part or full prepayment without penalty so you can foreclose on the loan early if cash flow improves.
Conclusion
Choosing the right loan tenure requires balancing between EMI affordability, total interest outgo and loan end-use. When in doubt, start with a lower tenure - you can always extend it later by paying a small admin fee to the loan provider if cashflows are tight. Having the financial discipline to repay the loan within a reasonable tenure will ensure you remain debt-free quickly.
