Personal Loan: 5 key determinants of repayment tenure that you need to know

When you are aiming to secure a personal loan, choosing the most appropriate repayment tenure is critical. This is because a very short tenure can strain your monthly budget, whereas a longer tenure can even stretch the entire repayment process, making it draining and difficult to manage.

That is why there are several important determinants that you should give due importance to while deciding on a repayment tenure. So that borrowing remains a pleasant experience for you. Here is what you should consider before committing:

I. Loan amount

The loan amount you aim to secure should align with your requirements. You should never overborrow or take on more debt than necessary. The higher the loan amount you aim to secure, the longer you may need to repay.

Lending institutions often recommend choosing a tenure that balances your monthly instalments with your financial capacity and current credit score. The idea is to protect both your repayment profile and your future borrowing potential.

II. Interest rate

How quickly you can clear your personal loan depends on the applicable interest rates. Higher interest rates can make shorter tenors more expensive, whereas lower rates offer greater flexibility in choosing a repayment period. Still, when the repayment period is stretched, the overall interest outgo also increases.

III. Monthly income

Your monthly income is another critical element in deciding your final repayment tenure. It decides on how much EMI you can comfortably repay and manage. Lending institutions generally suggest that your EMI should never be more than 25-30% of your take-home pay. This means, for example, if your monthly income is ₹1,00,000, then your total EMI outgo should not be more than ₹25,000-30,000. This way you will never fall in a debt spiral.

IV. Existing debt obligations

In case you have any other personal loans, EMIs, or ongoing home loans, then your repayment capacity is bound to decrease. That is why you should carefully analyse your debt-to-income ratio properly before deciding on a repayment tenure.

V. Lender policies

Different lending institutions have different policies, such as prepayment penalties, fines for missing due dates, flexibility in repayments, unique restructuring options in case the borrower fails in making repayments on time, along with strict rules on recovery in case the borrower defaults.

When you diligently review these policies and compare lending institutions effectively, only then can you save yourself from hidden charges, avoidable expenses and high interest costs, thus ensuring swift closure of the loan.

Important risks to keep in mind

All personal loans come with high interest rates as they do not require the borrower to pledge any collateral. If EMIs are delayed, then debt can snowball and create legal complications for the borrower.

These developments can damage your credit profile and bring down your credit score. Before availing a personal loan, you should sit down with a certified financial advisor to ensure that your repayment plan is manageable, prudent and realistic.

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