Things To Consider While Choosing Personal Loan Tenure

Personal Loans are popular loan option as they’re easy to obtain as they get easily approved. They score on convenience as well. Personal Loans can be put to use as per the borrower’s needs. So, people more often resort to taking Personal Loans. The interest rates are high, and that is the reason why you need to choose your Personal Loan carefully.

There are a couple of things that you need to keep in mind while choosing a Personal Loan. The tenure is one of them.

Personal Loan tenure is the time taken to repay the loan in full, the principal plus interest. It is the loan tenure that determines your interest outflow and the EMI. So, before you sign on the dotted line, choose a tenure that maximizes the benefit of availing the Personal Loan. So, what should you opt for—short tenure loan or long tenure loan? Read on to know more.

Short Tenure or Long Tenure Loan?

Short Personal Loan Tenure

The best part about choosing a short Personal Loan tenure is that you’re cleared of your liability very soon. So, you save quite a bit on interest. However, on a short tenure loan, the EMI is bound to be high. There will be a large monthly outflow towards the EMI. If you face a shortage of cash inflows, you could default in the EMI payment attracting a penalty. Plus, your credit rating will be adversely affected as well.

Long Personal Loan Tenure

A long tenure loan gives you a substantial amount of time to pay off. As the loan tenure increases, the EMI decreases. A lower EMI will not pinch your monthly budget. Plus, there is a lesser chance of default on EMI repayments. On top of all, you will be able to enjoy your lifestyle without the worry of high EMI payments staring down at you and pulling apart your purse strings. However, in the process of stretching the loan tenure, you will end up paying more, in terms of the overall interest charges.

Now how do you choose the ideal tenure such that it does not pinch your pocket and at the same time prevents you from defaulting? Here are some of the factors that you must consider before choosing the Personal Loan tenure.

4 Factors Affecting Your Personal Loan Tenure

1. Monthly Budget: You certainly cannot be spending more than what you earn. Budgeting is the key to financial success and it is the key to deciding how much loan you can take without being saddled with a liability. Match your expenses against your incomes. Calculate the surplus. Check if the surplus can be maintained in the months to come. Based on the amount of surplus that is in your hand, you can decide on the loan tenure.

2. Future Earnings: Future earnings are a decisive factor when choosing the loan tenure. A salary hike, a prospective gain from investments, or sale of asset can increase your future cash inflows. By choosing a loan tenure that matches the time you stand to gain from probable income sources, you can opt to pay off the outstanding loan amount and reduce interest outflow.

3. Estimate Your Liabilities: /b>The Personal Loan that you choose to avail is a liability that eventually has to be paid off. But, before your take a Personal Loan and decide on its tenure, assess your current liabilities as well as the liability that might arise in the near future.

An estimation of these liabilities will help you balance your income sources against the liabilities and choose the loan tenure. The liabilities that need to be considered include the EMIs on existing loans, household expenses, children education expenses, and card repayments, to cite a few.

4. Calculate the Interest Charges: Interest is chargeable on any loan and in case of a Personal Loan, the interest charges can be quite high. In fact, interest rate on Personal Loans are the highest as these are in the nature of unsecured loans. That is you can avail Personal Loans without furnishing any security. With online calculators, you can compute the interest charges at varying tenures on the loan amount. The longer the loan tenure, higher would be the interest charges. On the other hand, shorter loan tenures have lower interest charges.

A loan, by whatever name it goes is a liability that you must pay back at some point of time. Exercise due care when deciding on how much loan you choose to take. Make sure that your current resources can service the loan obligation and choose the Personal Loan tenure accordingly.

I Arjun Singh is the financial consultant with experience in trading and investment. Everything I write is based off my personal experience because money and life is too important to be left up to pontification.