- Is the current personal loan EMI too much for you?
- Think of increasing the personal loan tenure to reduce the EMI - Read this post to know how it can impact you
The tenure plays an important role in every loan, including a personal loan, which you can take for a maximum of 5 years. State Bank of India (SBI) and a couple more lenders can offer you more time to pay a personal loan. Ideally, one should choose an optimized personal loan tenure, which should be neither too short nor too long. This ensures a substantial reduction in the overall interest outgo. But things may not go as you plan. Uncertainties could come in your way and make it tough for you to pay off the personal loan EMI on time. In that case, you would like the EMI to be lower. This can be possible if the lender agrees to increase the personal loan tenure. However, you could end up raising overall interest obligations by doing so.
But will the lender accept your request of increasing the tenure? Well, it will depend from one lender to another – some could, some may not. We have put some points based on which the lender can at least think of increasing the tenure. Read this post to know such points.
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Factors That Lenders Consider Before Deciding to Increase the Personal Loan Tenure
The hike in the personal loan tenure will depend on factors such as debt to income ratio, existing loan repayment track, the stage of your life, etc. Let’s read these factors in detail.
Loan Repayment Track
Any changes to the running personal loan structure will depend on the repayment track. As soon as you request the lender to increase the personal loan tenure, it will first check your repayment track and see how diligently you have paid the EMIs. The lender will examine the repayment track spanning for a minimum of 9-12 months. If the lender finds spots of payment delays, it could consider increasing the tenure to reduce the EMI amount and help you pay the same on time.
Debt to Income Ratio
When taking a personal loan, the EMI may have been within 50% of your net monthly income at the time of loan application. And that must have made the lender approve the loan without any fuss. But with time, you may take additional loans, which could raise your debt in proportion to the income you must be having. In case you have taken loans and the total debt obligations are more than 60% of your income, the lender could raise the personal loan tenure to prevent a possible default like situation in times to come.
If you haven’t taken any more loans but are still struggling to make personal loan payments on time, it could then be an issue of salary not rising in proportion to inflation. If that remains your case, put this reason before the lender while requesting it to increase the personal loan tenure. The lender will take note of that and ask you to submit salary slips and bank statements. When you submit a fresh personal loan application, the lender asks you to submit the last 3 months’ salary slips and last 6 months’ bank statements. But here, the lender could ask you to submit salary slips and bank statements for a year or more. You might find it hard to arrange salary slips for so long. In that case, you can submit the salary appraisal letter that you must be getting at the end of each year from your workplace. In case the lender finds the salary hike is negligible or there’s no salary hike, it could think of raising the personal loan tenure.
Stage of Your Life
Someone close to the retirement age might find it hard to get their personal loan tenure increased. The reason – If the lender increases the tenure beyond the retirement age, it could only increase the possibility of non-payment. To prevent such incidents, the lender will keep the tenure within your retirement age. But if the retirement is far away, the lender can think of increasing the tenure provided you are genuinely facing loan payment issues.
Shall You Use the Personal Loan Balance Transfer to Bring Down the EMI?
In case the above options do not come to your use, you can mull a personal loan balance transfer, which is a process by which you can transfer your existing loan to another lender at a lower rate of interest. But the new interest rate should be lower than the existing one by at least 4-5%. This will ensure quite a reduction in the overall interest outgo while also decreasing the EMI more. An example below will help you understand the matter better.
Example – You are paying a 5-year personal loan of INR 6 lakh at an interest rate of 17% per annum. It’s been 2 years since you started paying the personal loan EMIs. If you are offered a balance transfer facility at 12%, how much will it benefit you? The table below will show you the same. Take a look.
|EMI on INR 6 Lakh at 17%||INR 14,912|
|Interest Payable at 17% Over 5 Years||INR 2,94,693|
|Interest Paid So Far Till Now||INR 1,76,121|
|Outstanding Balance Till Now||INR 4,18,244|
|EMI Payable at 12%||INR 13,892|
|Interest Payable at 12%||INR 81,857|
|Interest Paid at 17% + Interest Payable at 12% on a Balance Transfer||INR 2,57,978|
|Savings in Terms of EMI||INR 1,020|
|Savings in Terms of Interest Payments||INR 36,715 (2,94,693-2,57,978)|
The new lender will charge a balance transfer fee, which could reduce your savings a bit from INR 36,715. If the new lender agrees to increase the remaining loan tenure from 3 to 4 years, the EMI will reduce further. But there won’t be much savings in terms of interest outgo, thereby defeating the purpose of a personal loan balance transfer where the motto remains to reduce interest payments as much as possible.
Now that you know the factors that can help increase your personal loan tenure and reduce the EMI amount, implement them carefully. In a bid to reduce the monthly installments, many choose to increase the tenure so much that they end up paying much more. As personal loan interest rates generally remain high, continuing the loan for a much longer time can increase your cost substantially. While you can’t avoid uncertainties, being irresponsible in your spending is not warranted. When you have a loan obligation, ensure you define your income differently so that you don’t come to a situation where you will need to ask the lender to increase the personal loan tenure. Making expenses based on the income you are left with after paying the loan EMI will help you immensely.