Personal loans are unsecured loans offered by banks 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 a long repayment tenure.
Pros of Long Repayment Terms on Personal Loans
# You can reduce your monthly repayment burden: The best thing about opting for a 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.
# You can pre-close your loan before your tenure matures: 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.
# You can go in for a top-up loan: 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.
# You can improve your 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.
# You can go in for a higher loan amount: 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.
Cons of Longer Repayment Tenures
# You’d be paying more interest: The main drawback of going-in for a long tenure is that you’ll end up paying more interest over the course of your tenure. The amount of interest on a given rate increases with every additional year. If you are going-in for a small loan amount, it is best to opt for a short tenure to avoid paying unnecessarily inflated amounts towards interest.
# You’ll be in debt for a longer time-period: Not surprising, the longer your tenure, the longer you’ll be in debt. With proper financial management, however, this isn’t something that you should be too concerned about.
(By Aditya Kumar, Founder & CEO, Qbera.com)