Whenever you want to borrow a home loan or any loan your eye ball catches attention with the lowest EMI on the amount. But, you hardly pay attention that the lowest EMI is offered on the maximum tenure. Before applying for a loan, you need to take a decision on few things prior you submit your application & documents with bank. You have to decide first what will be the amount you want to borrow and what will be the tenure of your loan? Though, the interest rate is pre-decided by the bank on your eligibility, but you should always ask for a better rate from the bank. At the time of finalising the tenure you should always try to avail the loan for lowest duration if your monthly budget allow. Take a loan for shorter duration, it will help you to repay the amount faster with less interest outgo. Let's understand this with two different scenario: Rohit has borrowed a home loan from X bank of Rs. 20 lakhs for 10 years at the rate of 9.65% per annum. His EMI calculation will be:
Loan amount: 20,000,000
Monthly EMI: 26,044
Total interest amount: 11,25,285
Total amount paid (Principal+ Interest): 31,25,285
In second scenario Mukesh has borrowed a home loan from X bank of Rs. 20 lakhs for 25 years at the same interest rate. His EMI calculation will be:
Loan amount: 20,000,000
Monthly EMI: 17,683
Total interest amount: 33,04,877
Total amount paid (Principal+ Interest):53,04,877
If you analyse these situations you an easily find out that both of them have taken the same amount with same rate of interest, but for different tenure. You can easily figure out the difference in out go of interest and total amount repaid against loan. However, Mukesh was paying the lower EMIs, but he paid almost Rs 22 lakhs extra compared to Rohit.
In most of the cases, people are more concerned about paying the lower EMIs, but don't focus on the portion of extra amount they will pay in long turn. Here are some important reasons why you should take a home loan for shorter duration.
Less interest: The longer your tenure, the higher amount you will return on your loan amount. If you will avail a loan for shorter duration the interest amount you pay will be lesser. You will be paying everything at a quicker pace. Therefore, you will consume less time to repay the loan. Even if the interest rate will be lower in the longer run still you will pay more money in whole tenure.
Lower interest: Banks charge you lower rate of interest if you are borrowing the amount for shorter duration. For instance, if you are applying for home loan of Rs. 60 lakhs for 30 years your rate of interest will be higher, but if you will avail a loan for 15 or 20 years your interest rate will be lower.
Easy to manage: It is not easy to predict the situation for next 20 years or 30 years when your finance is related. Nobody knows and can predict how the economy will be in next 10 or 20 years. With the long term loan, you will still be responsible for payment for your amount till the whole tenure irrespective of the financial situation. But, if you are availing the loan for a shorter duration you can still manage your funds for shorter duration.
Less stress: Owning money for a long period of time creates stress and increase your psychological pressure. With a short-term loan, you will have paid off your debt more easily and faster than longer duration. It will give you sense of ease when you get free from financial burden.
Credit score increase: If you are borrowing the loan for shorter duration and paying it off on timely manner it will give a great boost to your credit score. It will improve your CIBIL score and increase your loan eligibility.
Building equity faster: If you are taking the loan for shorter duration, it means that you will pay off your debt faster and building your equity rapidly.
Faster disbursal: If you are availing a loan for shorter duration with lower amount, it will be disbursed quickly. If you need a faster loan disbursement you should go with shorter duration and lower amount.
Get legal possession soon: This is another advantage that you will get legal documents from bank sooner. If you have taken the loan for 20 year or 30 years, so for the time you will not be able to get your original property documents from the bank. At time of taking the home loan you deposit your property documents as security with the lender. This is very beneficial that you get your property legal authorisation sooner as compared to longer term.