Easy Tips to Choose The Right Personal Loan Tenure
Are you having trouble paying your bills and needing access to funds immediately to get out of a financial crisis? Plan to ask a family member for a favour? Don’t! To meet the need, you can opt for a personal loan, which will cost you the least amount of interest. But before you apply for a personal loan, you should know a few things, and personal loan tenure is one of them.
Since interest is paid on the principal balance, the time it takes to pay back a personal loan is a key factor in figuring out the interest. It also affects your monthly payments. The shorter the personal loan tenure, the higher the monthly payments, and vice versa.
Read on to learn how to wisely choose a personal loan tenure to get the most out of it. Before going any further, let’s define personal loan tenure in simple terms.
Meaning of personal loan tenure
For someone who has never taken out a personal loan before, it’s important to know how they work. One of the most important parts is the personal loan tenure.
So, what is the personal loan tenure? It is when you must pay back the loan to the lender. EMIs are paid on a set date every month and are used to pay back the loan.
A lender can give you a loan for a long or short time. But in the end, it is up to you to decide how long it will last. The shortest personal loan tenure is 6 months, and the longest is 60 months.
Importance of the Correct Personal Loan Tenure
Choosing the correct tenure saves you money. It makes your monthly instalment payments manageable and doesn’t strain your budget. Here are some of the other good things about it:
- It enables you to establish a favorable credit score. This makes getting good loan rates easier.
- Lenders may use this information to evaluate how well you repay debt.
6 easy steps to choose the correct personal loan tenure
- Monitor your monthly budget and spending.
One of the most important things to consider when choosing a personal loan tenure is how much it will cost each month. All you have to do is write down what you spend each month and subtract that amount from what you earn each month. Now, look at how much money you will have left and how much you will need to save for future costs. The amount left over is what you’ll pay each month as your EMI. Choose an EMI that fits easily into your budget, and never take on more than you can handle.
Understanding with examples
Let’s assume Rekha wants to apply for a personal loan. She makes Rs. 40,000 a month. Her expenditures each month come to Rs. 20,000. So, after saving, the best monthly payment will be between Rs. 5,000 and Rs. 10,000.
- Pay attention to future possibilities.
Whether you have a job or run your own business, there comes a time when you can get a raise or grow your business. So, if you expect your salary to go up shortly, you will have more room to pay the higher EMI amount. This way, you’ll not only pay off the debt faster, but you’ll also save a lot of money on interest costs.
Understanding with examples
Let’s extend the above example. Rebecca received a promotion of Rs. 10,000. Now, she earns Rs. 60,000 a month and still spends Rs. 28,000. Now, it won’t be hard for her to pay an EMI of up to Rs. 20,000. This will reduce the personal loan tenure to a certain number of months and lower the interest rate.
- Consider your current liabilities.
When you have other financial obligations, taking those into account can also help you choose the right personal loan tenure. Most of the time, you must consider other loans, credit card payments, rent, school costs, and others. Make sure you pick a term that lets you meet all your obligations without too much trouble. Use spreadsheets and the right formulas to get a clear picture of what needs to be done.
- Loan Amount
How long you have to repay a personal loan depends greatly on how much you want to borrow. If you want to borrow a small amount, like 2-3 times your monthly earnings, you should aim for a shorter personal loan tenure. This is because a longer term will cost you more in interest.
Also, if you want to finance a large amount of money that is 6–8 times your earnings, you should choose a longer term. Choosing a short personal loan tenure puts pressure on your finances and could lead to a mistake, which is even riskier.
- Determine interest rates.
Personal loan interest rates depend on your credit score, which also affects whether or not you can get a personal loan.
Aside from your credit score, the time you choose to repay the loan also affects the interest rate. Most of the time, interest rates are lower for loans with shorter terms and higher for loans with longer terms.
If you’re given a lower interest rate depending on your credit score, choose a shorter term to save on interest.
If you have a low credit score, choose a longer term since a shorter personal loan tenure with more interest would hurt your budget. By choosing a longer term, you can also enhance your credit score, which will help you get loans in the future.
- Use an EMI calculator.
If you still can’t decide on personal loan tenure, you can use an EMI calculator. A simple, free online calculator can help determine how long the loan will last and how much the EMI will be. Change the loan term and EMI formula to get the best monthly payment.
With the help of a personal loan EMI calculator, you can figure out how much you will pay in interest and how much you will pay overall (interest plus principal). You can also combine different loan terms with the recommended loan amount to find the personal loan tenure that works best for you.
Wrapping Up
Personal loans are the simplest type of loan. They are also easier to get approved for than other types of loans. But before deciding on a personal loan tenure, you should weigh the pros and cons of each. You must also read the loan terms carefully. No matter what repayment term you choose, stick to the due dates to avoid any extra trouble.
If you want to know more about choosing the right personal loan tenure, visit Piramal Finance for more blogs like this.