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How to Choose the Right Personal Loan Tenure?

Highlights

  • Choosing the right personal loan tenure means both EMI and interest payments are under control
  • But what is the right tenure and how can you decide it? Read this post to know the same

When choosing a personal loan offer, the focus often remains on getting the desired loan amount at a lower rate of interest. But not many emphasize on choosing the right loan tenure and end up paying much more. The right tenure means an optimized one, which is neither too short nor too long. A personal loan can be given for a maximum of 5 years. But will you benefit by taking a loan for that long? Maybe not! Given the higher interest rate that a personal loan comes with, such a tenure could lead to interest payments of somewhere around 50,000-1,00,000 more than when you go with a tenure of 1-2 years less. But how will you choose such a shorter tenure and reduce interest payments? What will help you ensure so? Read this post for the same.

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Factors That You Should Consider to Choose the Right Personal Loan Tenure

Choosing an optimized personal loan tenure depends on your savings, the loan amount you require, interest rates, etc. Let’s read all such factors below.

Interest Rates

As personal loans are unsecured, the interest rate can get higher. Personal loan interest rates can range from 10-25% per annum. Lenders set interest rates based on your income, credit score, workplace, etc. If you have a credit score of 750 and above, it means you have managed your debt responsibly. Such responsible credit behaviour can get you attractive interest rates when you apply for a personal loan. Further, if you have a solid income and are working in a top-notch firm, the interest rate can be lower. Maybe you need to negotiate for a lower rate with the lender if you don’t get it in the beginning.

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If you grab a lower rate deal and choose a relatively shorter tenure, the interest payment can reduce much more. An example below will help you understand better.

Example – You get a personal loan of INR 7 lakh at a 12% interest rate. How will you benefit more by keeping the loan tenure to 4 years instead of the maximum 5 years? Let’s find out in the table below.

TenureEMIInterest Outgo
4 YearsINR 18,434INR 1,84,817
5 YearsINR 15,571INR 2,34,267

You could see by choosing a shorter tenure of 4 years, your interest liability is getting reduced by INR 49,450 (2,34,267-1,84,817). The EMI increases by just INR 2,863 (18,434-15,571). So, if you can manage that slight increase in the EMI, choosing the 4-year personal loan tenure makes sense.

A look at the personal loan interest rates of top lenders will only help you compare and choose the right deal for you.

LendersInterest Rates (In Per Annum)
HDFC Bank10.75% - 21.30%
ICICI Bank10.75% - 18.49%
State Bank of India (SBI)9.60% - 13.60%
Kotak Mahindra Bank10.75% - 17.99%
YES BANK10.75% - 17.00%
Bajaj Finserv10.99% - 16.00%
Axis Bank12.00% - 24.00%
Bank of Baroda10.25% - 15.60%

Current Income

Don’t go for 5 years, the maximum tenure that you can get in a personal loan, if you are earning enough to pay the loan over 3 to 4 years comfortably. Do check with the lender whether you meet the personal loan eligibility for a shorter tenure. If you do, lenders can give you such a tenure to aid your savings. Here also, if we consider an example, it will help us understand the point better.

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Example – You are earning INR 60,000 (Net) in a month. If you want a personal loan of INR 7 lakh at an interest rate of 13% per annum, how much effect the repayment will have on your income across different personal loan tenure options? Let’s find out.

TenureEMIInterest OutgoPercentage of EMI to Income (Approx.)
3 YearsINR 23,586INR 1,49,08839.31%
4 YearsINR 18,779INR 2,01,40431.30%
5 YearsINR 15,927INR 2,55,62926.55%

You could see interest payments getting reduced by around INR 1,06,541 (2,55,629-1,49,088) as the personal loan tenure gets shorter from 5 to 3 years. The EMI also increases by around 14% with the shortening loan tenure. Lenders generally offer you the loan amount that keeps the EMI plus any other existing obligation to around 40-50% of your net monthly income. In case you do not have any existing loan obligation, you can easily get the loan for around 3-4 years given that the EMI is within 40% of your income during the said period.

Savings

Don’t hesitate to use your savings to decrease the personal loan amount. This will only help you reduce your interest payment. And if you choose the personal loan tenure smartly, the interest will reduce even more. So, if you want a personal loan of INR 6 lakh and have a savings of say INR 2 lakh, you can use INR 1 lakh of your savings and apply for INR 5 lakh. Further, you can choose a personal loan tenure of 4 years instead of 5 years. Assuming the interest rate remains 14% per annum, how much will the interest reduce if you use your savings and choose a 4-year tenure? Let’s check out in the table below.

In case you don’t use your savings, what will be the repayment scenario then? The table below will indicate the same.

TenureEMIInterest Outgo
4 YearsINR 16,396INR 1,87,003
5 YearsINR 13,961INR 2,37,657

You could see more interest payments for you on not using your savings.

Conclusion

Choosing the right personal loan tenure is as vital as choosing the right loan amount and interest rate. If your financial situation allows you to choose a shorter tenure, do it and save on a personal loan. Remember, every penny counts!

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  • Personal Loan Interest Rates September 2020
    Fullerton India14.00% - 33.00%
    HDFC Bank10.75% - 21.45%
    ICICI Bank10.75% - 18.49%
    IndusInd Bank11.25%
    Kotak Bank10.99% - 20.99%
    RBL17.50% - 24.00%
    Standard Chartered Bank11.00% - 15.00%
    Tata Capital10.99% - 18.00%