What is the Ideal Personal Loan Tenure

Of all the loan products, Personal Loan is the easiest to get. It is a good friend indeed. Let’s look at some of the advantages of applying for a Personal Loan.

  1. Usually, Personal Loans have the fastest turnaround time.
  2. Disbursement is also quick. You get the amount in your savings account within no time.
  3. The approval process is simple. You should have a good credit rating and a sustained income. The Personal Loan eligibility criterion is a straightforward one.
  4. It is an unsecured loan. There is no need to furnish any collateral to avail the loan.
  5. The banks do not verify the end use of the funds.

There are some demerits as well. It is better if you know them.

  1. As the loan is an unsecured one, the rate of interest on such loans is higher than the others.
  2. Banks usually do not allow you to close the loan prematurely. They inflict penal charges that can amount to 2% to 4% of the loan outstanding.
  3. The standard Personal Loan tenure is between 36 and 60 months.
  4. People with bad credit score are usually not eligible for Personal Financing.

In spite of these drawbacks, the Personal Loans are the most sought-after loans.

How do you select the Personal Loan tenure?

The following tips should help you choose the right tenure for your Personal Loan.

When you opt for Applying for a Personal Loan online through the loan service providers, you can compare the interest rates offered by various banks. It will help you to choose the right product. You can use the EMI Calculator and determine the EMI (Equated Monthly Instalment) amount for varying tenures. You can make the right decision by comparing them.

  1. You know your liabilities, both current and contingent. The proposed Personal Loan EMI will be over and above these liabilities.
  2. Check out whether you will be able to afford the EMI. Any default on your part can result in deterioration of your credit history.
  3. In case you avail a loan of 200,000 @ 13% p.a., your EMI for 48 months will be around Rs. 5,365. At the same time, your EMI for 60 months will be Rs. 4,551.
  4. In the earlier case, the total outflow will be 257,544 at the end of 48 months. In the latter case, your outflow will increase to Rs. 273,037. You end up paying Rs. 15,493 more.

Compare both the equations. The lower EMI, i.e. Rs. 4,551 looks attractive, but you end up paying more. In case you choose the smaller tenure, you should ensure that you pay Rs. 5,365 every month. If you can afford the same easily, you can opt for the shorter tenure.

What do the figures signify?

  1. A shorter tenure will result in a higher EMI, but a lower total outflow.
  2. A more extended tenure has a smaller EMI, but a more significant total outflow.

If your liabilities are within control, you can opt for the shorter tenure. Remember, this will increase your total current liabilities.

Can you foreclose the Personal Loan?

Many banks do not allow the foreclosure of Personal Loans. It is better to check up with the lending institution whether they will enable you to make a pre-payment. Some banks charge a pre-payment penalty in the range of 2% to 4% of the outstanding amount. You have to factor in this liability while deciding to foreclose the Personal Loan.

Can I make a prepayment without closing the loan?

Yes, banks allow you to pay a lump sum amount subject to the imposition of a penalty at the prescribed rate. However, note to pay the subsequent EMIs as agreed on time. Do not skip your EMIs under the pretext that you have made a lump sum payment. Default in EMI will show on your credit report. It can adversely affect your credit score.

When is premature closure of a Personal Loan preferable?

Imagine you have received a bonus payment from your employer. You wish to reduce your liabilities by making a prepayment of your loans. Compare all your loans and opt to pre-pay the loan that attracts the highest interest rate. Now, Personal Loans do have the highest interest rate apart from Credit Cards. Therefore, you can repay your credit card dues if you have a lump sum amount at your disposal. After that, you can consider repaying your Personal Loan. It is beneficial in spite of the foreclosure penalty.

Also Read : Credit Score: Your Ticket to a Dream Vacation

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