28 Feb 2014

Rupeepower Editorial Team

Personal Loan Tenure

How to Choose Personal Loan Tenure?

What is Personal Loan Tenure

Personal Loan Tenure is the duration for which you borrow the money. The minimum personal loan tenure is 1 year. The maximum personal loan tenure is 5 years. Your personal loan tenure influences:

  • Maximum borrowing amount
  • EMI (total interest you pay)
  • Interest
  • Banks Options

Personal Loan Tenure & Loan Amount

The maximum borrowing amount increases as you increase your personal loan tenure. A bank has restrictions on DBR. DBR is debt burden ratio. This is a ratio of the EMIs you pay to your salary. Banks do not want your DBR to be above 40-60%. In other words the banks do not want your EMIs to exceed 40-60% of your income. Such restrictions are put to prevent people from defaulting on their loan. It is hard to pay an EMI which takes away 40% of your income.

If you increase your personal loan tenure, your EMI falls. Spreading the repayment over more years, reduces your EMI. This reduces your debt burden ratio. Thereon, you can take upon a higher loan amount.

Personal Loan Tenure & EMI

Increasing your personal loan tenure, reduces your EMI payments. Spreading the repayment over a longer personal loan tenure reduces your EMI. Increasing the personal loan tenure reduces the monthly repayment of the borrowed amount.

Personal Loan Tenure & Interest

Your interest rates are unaffected by your personal loan tenure. But, the interest payments are affected by your personal loan tenure. Banks charge you interest for the pending borrowed amount. If your loan tenure increases for 1 year, you will be paying additional interest for the remaining balance for 1 additional year.

Personal Loan Tenure & Bank Options

Different banks have different debt burden ratios. Many times a bank will not be able to offer you a personal loan for a shorter loan tenure. Shortening the personal loan tenure increases the EMI which further increases the DBR. If it goes above the bank norms, you will be ineligible for the bank.

Shorter Tenure Vs. Longer Tenure

Shorter Personal Loan Tenure

Shorter personal loan tenure reduces the overall interest you pay. But, they increase the EMI payment. Higher EMIs mean a higher chance of defaulting on your loan. A shorter personal loan tenure will reduce the overall interest payment, but increase chances of default. Defaulting on your loan can have a lot of repercussions. CIBIL or the credit information bureau of India records such defaults. This makes it extremely hard for you to avail another financing option for some time.

Longer Personal Loan Tenure

Longer personal loan tenures reduce your monthly EMI. But, increases the overall interest payment as you pay many more numbers of EMIs. Having a low EMI allows you to maintain your lifestyle. Further, they prevent you from defaulting on your loan. This ensures that whenever you need money again for any purpose, you are able to avail low interest loans.

Personal Loan Tenure Thumb Rule

This question is very important. You should always be comfortable paying your EMI. So, always go for the shortest loan amount considering:

  1. You can comfortably pay your EMIs
  2. You have sufficient money remaining for other needs
  3. You will be able to pay your EMI, even if you are hit with an emergency

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