Personal loans cater to a variety of needs such as urgent medical needs, home improvement, and a holiday of a lifetime. The critical factor that the borrower pays least attention to during a personal loan application that has a major influence on the monthly instalment and the cumulative interest paid throughout the loan is the tenure of the loan—the duration of the loan period during which the borrower has to repay the loan. The tenure of the loan has a major effect on the monthly instalment and the cumulative interest paid throughout the loan period.
What is a Personal Loan Tenure?
Personal loan tenure pertains to the period during which the borrower commits to returning the borrowed sum of money to the lending company. This period can vary widely, typically ranging from a few months to several years, depending on the lender’s policies and the borrower’s eligibility. The tenure that you opt for has a direct influence on the Equated Monthly Instalments (EMIs) and the total price of the loan.
Minimum and Maximum Tenures: Industry Standards
Personal lending tenures also vary among institutions about the sum of the loan, the borrower’s credit record, and the rules of individual lending companies.
Minimum Tenure:
There also include loans with 3-6 month tenures that are offered by specific lenders.
For example, the tenures of the loans at Stashfin start at 3 months and suit the short-term credit needs of the borrowers.
Maximum Term
Personal loans with higher tenures of 5 to 7 years are also available.
These institutions might also extend the duration further based on the borrower’s repayment capacity and the loan sum.
For example, the bank has a personal loan with a 7-year tenure with the option of lower equated monthly instalments paid over a long duration of time.
Factors affecting the tenure option
Selecting the appropriate duration of the loan necessitates a careful analysis of several individual and economic variables:
- Monthly income and spending
Assess your monthly cash flow and calculate how much you can afford to put toward a loan without compromising the comfort of your finances.
- Loan Amount:
Larger loans might necessitate tenures that don’t make the EMIs prohibitively costly. Short tenures might be permitted for smaller loans instead.
- Interest Rates:
Interest rates also vary depending on the tenure option that has been chosen. Short tenures normally yield lower interest rates with higher equated monthly instalments and higher tenures might yield higher rates with lower monthly instalments.
- Financial Goals:
Align the loan period with your goals. A shorter period of the loan will be suitable if you want to keep the total interest paid lower. Yet if lower EMIs will be preferred to keep the cash flow smooth, a higher period of the loan will be suitable.
Influence of Tenure on Total Interest and EMI
Your tenure has a crucial effect on how much you will need to pay monthly and the total interest paid throughout the lending period. Here’s how tenures will affect your payments differently:
- Shorter Tenure:
- Higher EMIs:
By shortening the period of the loan, the monthly instalment will be larger.
- Lower Total Interest:
The overall interest paid is less since the principal amount is repaid quicker, reducing the interest accumulation.
- Longer Tenure:
- Lower EMIs:
Spreading the loans’ repayment period reduces the monthly payment, making it easy to bear the short-term cash flow strain.
- Higher Total Interest:
The longer the repayment period has the effect of charging higher interest over time and making the overall price of the loan higher.
Example:
Assume that you borrow an amount of ₹5.5 lakh at an interest of 11%
- 4-Year Tenure:
- EMI:
Approximately ₹14,215
Total interest
Around ₹1,32,322
- 3-Year Tenure:
- EMI:
Approximately ₹18,000
Total Interest
Around ₹98,227
Selecting the smaller tenure increases the EMI by almost ₹3,785 but saves almost ₹34,095 in interest in the long run.
StashFin Flexible Tenure Plans
Stashfin, a prominent digital lending platform, offers personal loans with flexible tenure options ranging from 3 to 36 months.
This flexibility permits the borrower to choose a period of the loan that fits with the borrower’s cash flow and financing capabilities.
Also, Stashfin has an interest-free repayment option within a month that allows the borrower to repay the loan with no extra interest if paid within this duration.
Making the Right Choice
Selecting the correct personal loan tenure involves a trade-off between easy EMIs and the sum of the interest paid.
Here are a few steps that will help you take the call:
- Assess Your Financial Position
Consider analyzing your income and expenses and the existing debts against the proposed monthly instalment of the loan to arrive at the answer.
- Define Financial Goals:
Decide whether your priority is to minimize monthly outflow or to reduce the total interest paid over the loan’s lifespan.
- Use EMI Calculators:
Utilise online EMI calculators and perform simulations of different tenures and varied loan amounts and interest rates. This will provide a clear picture of the anticipated EMIs and also aid comparison of options.
- Meet with Financial Advisors
If you’re not sure, seek advice from monetary experts who will provide individual advice based on the state of your finances and goals.
Endnote
Understanding and choosing the appropriate personal loan tenure plays a vital part in good financial planning. This ensures that the repayment of the loan becomes easy and that you don’t end up paying extra interest charges. Through careful analysis of your finances and making use of flexible tenures such as those provided by Stashfin, it becomes easy to adjust a tenure that suitably fits your needs, leading the way to stability and peace of mind in finances.
