The EMI amount and interest costs for personal loans depend on the repayment tenure chosen by the borrower. While you can opt for shorter loan tenures to reduce your overall interest costs, selecting longer tenures will reduce your EMI burden, improve your loan eligibility, and reduce the chances of loan default. Here are the pros and cons of selecting longer repayment tenures on personal loans:
Advantages of Selecting Longer Tenures on Personal Loans
Lower EMIs offer flexibility to manage your personal finance
Prospective applicants can reduce the EMI of their personal loans by selecting longer repayment tenures. Lower EMIs lead to a reduction in the borrower’s monthly repayment obligations, thus reducing the burden on his/her personal finances. Selecting longer personal loan tenures also reduces the probability of borrowers defaulting on their EMIs in case of financial emergencies. Prompt repayment of EMIs by the due dates helps personal loan borrowers build or improve their credit scores, which in turn increases their eligibility for availing credit cards or loans in the future.
Personal loan borrowers having lower EMI obligations can accommodate both their planned and unplanned expenses along with having a sufficient surplus to invest towards achieving their crucial financial goals. Borrowers foregoing their monthly contributions towards unavoidable financial goals to pay higher EMIs may end up availing of higher interest rate loans in the future to fulfill those financial goals.
Improves your chances of availing higher personal loan amounts
Many lenders consider their loan applicants/NMI ratio to determine their repayment capacity. The EMI/NMI ratio calculates the percentage of an applicant’s net monthly income (NMI) that goes into servicing his debt obligations. Banks and non-banking financial companies (NBFCs) usually approve personal loan applications of prospective borrowers whose total debt obligations, including the proposed personal loan’s EMI, do not exceed 50-55 % of their monthly income. As longer repayment tenures lead to lower EMIs, prospective applicants exceeding the above-mentioned limit can apply for personal loans with longer tenures to bring down their EMI/NMI ratio and thereby, increase the probability of securing higher loan amounts.
Those planning to apply for personal loans in the foreseeable future should consider using personal loan EMI calculators available online on lender websites or financial marketplaces. Using an EMI calculator would allow you to find the optimum EMI and tenure for your personal loan, depending on your repayment capacity, before making the final personal loan application.
Greater options for personal loan applicants
Prospective personal loan applicants seeking longer tenures can choose from multiple lenders as most banks and NBFCs offer personal loan schemes with repayment periods between 1 to 5 years. Only a few lenders offer repayment tenures below 1 year on their personal loans.
Disadvantages of Selecting Longer Tenures on Personal Loans
Higher interest costs
Personal loan applicants opting for longer repayment tenures will pay higher interest costs due to the compounding of interest for longer periods. Hence, prospective borrowers having lower personal loan eligibility due to their restricted repayment capacity can initially select longer tenures on their proposed loan and make prepayments as and when they have higher monthly surpluses due to increased income.
Note that the RBI guidelines do not permit lenders to charge part-prepayment or foreclosure fees on personal loans with floating interest rates. However, lenders are free to levy these charges on fixed-interest rate personal loans. Some banks/NBFCs may also limit their borrowers from prepaying/foreclosing their personal loans until they repay a predetermined number of EMIs.Therefore, prospective borrowers should compare part-prepayment or foreclosure fees and restrictions of multiple lenders before making the final personal loan application.
Lower eligibility for availing additional loans
Opting for longer tenures on your personal loans can impede your repayment capacity for longer periods. As banks/NBFCs consider their loan applicants’ existing loan repayment capacity while assessing their loan applications, those applying for longer personal loan tenures may negatively impact their eligibility for availing additional loans in the future. Therefore, borrowers opting for longer tenures on their personal loans should try to make prepayments, whenever possible. Doing so will free up their repayment capacity and thereby, improve their eligibility to avail loans in the future. However, borrowers seeking to part-prepay or foreclose their loans should not sacrifice their monthly contributions or existing investments for their crucial financial goals to make prepayments. Doing so may force them to avail of loans at higher interest rates to meet those financial goals or deal with financial exigencies in the future.