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.