The EMI amount and total interest costs depend on the repayment tenure you select for your personal loans. While you can choose shorter tenures to reduce your overall interest costs, opting for longer tenures will minimise your EMI burden, increase your loan eligibility and reduce the chances of defaulting on your personal loan. Here are the merits and demerits of selecting longer tenures on personal loans:
Merits of Choosing Longer Personal Loan Tenures
Lower EMIs offer flexibility in managing personal finance
Personal loan applicants can reduce their EMI by opting for longer tenures. Lower EMIs would reduce the overall monthly repayment obligations of a borrower, thus leading to a lesser burden on his personal finances. It also reduces the possibility of the borrower defaulting on his EMIs during financial emergencies. Paying the loan EMIs by their due dates helps borrowers build or improve their credit scores and increase their eligibility for availing loans or credit cards in the future.
Having lower EMI obligations will allow them to accommodate their planned and unplanned expenses and may also leave them with surpluses to invest for their crucial financial goals. Those sacrificing monthly contributions to unavoidable financial goals for paying higher EMIs may have to avail higher interest rate loans in the future to achieve those financial goals.
Increases your chances of availing higher loan amounts
Many lenders consider the EMI/NMI ratio of their personal loan applicants to determine their repayment capacity. This ratio calculates the proportion of a loan applicant’s net monthly income (NMI) that goes into servicing his debt obligations. Lenders usually approve personal loans of applicants whose total debt obligations, including the EMI of the proposed personal loan, is within 50-55% of their monthly income.
As longer tenures lead to lower EMIs, those exceeding the aforesaid limit can apply for personal loans with longer repayment tenures to bring down their EMI/NMI ratio and thereby, increase the possibility of securing higher personal loan amounts.
Individuals planning to apply for personal loans in the near future should consider using a personal loan EMI calculator. You can use the EMI calculator for personal loans, available online on lender websites or on financial marketplaces. These calculators would allow you to find the optimum tenure and EMIs for your personal loan, based on your repayment capacity, before making the final loan application.
More options for personal loan applicants
Prospective borrowers seeking longer personal loan tenures have the option of choosing from multiple lenders as most banks/NBFCs offer tenures between 1 to 5 years on their personal loan schemes. Only a handful of lenders offer tenures below 1 year on their personal loans.
Demerits of Choosing Personal Loans with Longer Tenures
Higher interest costs
Applicants availing personal loans with longer repayment tenures will incur higher interest costs due to the compounding of interest for a longer period. Hence, opting for longer personal loan tenures leads to higher interest costs for borrowers.
Prospective borrowers having lower eligibility for availing personal loans due to their restricted repayment capacity can initially opt for longer tenures on their proposed personal loan. Later on, as and when their surpluses increase due to increased income, they can consider prepaying their personal loan. Doing so will increase their eligibility to avail loans or credit cards in the future.
Note that the RBI guidelines do not allow banks/NBFCs to charge prepayment/foreclosure fees on floating interest rate personal loans. However, lenders are free to levy the aforementioned charges on fixed-rate personal loans. Some lenders may additionally limit their borrowers from prepaying or foreclosing their personal loans until they repay a fixed number of EMIs.
Therefore, you should compare the prepayment/foreclosure charges and restrictions of multiple lenders and apply for a personal loan with nil or lower prepayment charges and/or fewer prepayment restrictions.
Lower eligibility for availing additional loans
Opting for personal loans with longer tenures can block your repayment capacity for longer periods. As lenders consider the existing loan repayment capacity of their prospective borrowers while assessing their loan applications, those applying for personal loans with longer repayment tenures may negatively affect their eligibility for availing additional loans.