When it comes to your personal loan repayment structure, getting your loan tenor right is of utmost importance. This helps you strike a balance between credit and interest outgo. A longer tenor allows for large-scale borrowing; however, too long a tenor means more interest payment. While personal loan interest rates are determined by lender-specific criteria, the personal loan tenor remains under your control as most lenders offer a flexible repayment term, usually stretching up to 60 months. However, should you opt for a long repayment term or not?
Here’s a guide on the pros and cons involved when you opt for a long personal loan tenor.
You Can Borrow more
If your immediate goals demand high-value financing, a long tenor will be beneficial as it allows you to space out your payments over a greater number of months. Doing so reduces your monthly outgo significantly and you can use a personal loan EMI calculator to arrive at the right tenor for the desired principal amount.
You Can Reduce Your Debt-To-Income (DTI) ratio
An EMI calculator helps you determine the monthly interest outgo for an adjustable tenor and the personal loan interest rate applicable to you. So, even if you do not need ample financing and simply want to keep repayment budget-friendly, this step can be advantageous. Further, some lenders’ personal loan eligibility criteria demand DTI ratios of 40% or less and to meet this, a long tenor may become a necessity.
You Can Build Your Credit Score
Since a chunk of your credit score is devoted to evaluating your payment history, a long tenor can help you remedy previous errors or simply build a strong score steadily. Timely and diligent EMI payments speak volumes of your ability to handle credit responsibly and with an improved score you can qualify for more credit and of diverse forms.
You Can Gain Access To Enhanced Loan Amounts
Some lenders allow you to avail a top-up loan once you have shown consistency in repayment for a specified amount of time. A longer tenor in this case, prepares the way for an enhanced sanction and this can be of value, especially if your goals demand substantial financial assistance.
You Pay More Interest
The downside of stretching your loan tenor is that even though your EMIs reduce, your net interest payments increase. This is because with a longer tenor you incur interest on your principal for a longer time. The key is to use the EMI calculator to maintain a balance between your EMIs and your total interest payments and opt for the shortest term you can manage.
You May Secure a Higher Personal Loan Interest Rate
Since lenders are less assured of your financial profile remaining unchanged over the long-term, a longer tenor can affect the interest rate at which you are offered the loan. To mitigate risks involved, lenders may charge higher personal loan interest rates and when combined with higher net interest payments, this can leave you servicing unnecessary amounts of debt.
You Remain in Debt For Longer
While shorter tenors impose heavier financial burdens, they allow you to get rid of debt faster. With a longer tenor, you’ll have to allocate a portion of your income towards debt payments for a greater number of months/years.
As you weigh the pros and cons and attempt to arrive at the right personal loan tenor, it’s important that you keep your lender’s offerings and terms in mind. For example, when you choose Bajaj Finserv, you get a personal loan of up to Rs.25 lakh, for a flexible tenor of up to 60 months, which you can prepay and foreclose any time you have excess funds. So, if you pick a long tenor, you always have the option of using surplus finances to pay off your debt before your tenor matures.
Further, when you opt for the flexi loan facility, you have to pay interest only on the amount you withdraw from your sanction, which you can do multiple times and allows you to pay interest-only EMIs for the initial part of the tenor.
Selecting the right tenor is all about tailoring the loan to your finances. You can obtain a customised offering in the form of pre-approved loan offers from Bajaj Finserv. Check your offer by sharing some basic details and get access to personalised financing.