A personal loan is an excellent choice for plenty of reasons.
Whether you want to take your family for a vacation or manage a cash crunch, a personal loan is all you need to meet all kinds of financial needs. The best part? You can get a personal loan - no questions asked - through a quick online application and choose a convenient loan tenure for easy repayments.
However, while a personal loan offers you unmatched financial freedom, the choice of loan tenure significantly impacts your finances. Typically, a shorter loan tenure can make you debt free sooner. But there are times when a longer repayment tenure makes much more financial sense.
Here's why a personal loan with a longer tenure could be a better choice for you.
Lower EMI payments
With a longer repayment term on your personal loan, you have the convenience of reduced EMIs. The total interest and the principal payment are divided over a long period. Lower EMIs allow you to manage your monthly expenses and fulfil your long-term financial goals without straining your finances.
Freedom to apply for a bigger loan amount
Before you apply for a personal loan, the key factor to consider is the loan amount you want to borrow. It depends upon your financial needs and affordability. A longer repayment tenure allows you to take a higher loan amount based on your debt-to-income ratio.
Most financial institutions prefer a debt-to-income ratio of 35-40% when sanctioning a personal loan. This means that your monthly obligations, existing EMIs, and current EMI should be 35-40% of your monthly income. Opting for a longer loan tenure can lower your DTI ratio as it enhances your repayment capacity. Thus, allowing you to borrow more funds.
Less chance of defaults
Lower EMIs significantly reduce your financial stress of managing the loan repayment. Higher disposable income reduces the chances of defaulting on EMI payments. Timely EMI payments also have a positive effect on your credit score.
It helps build a higher credit score
Your credit score is a critical factor in your loan borrowing process. But building a high credit score also takes a lot of time and stability. With a long-term personal loan, you have an excellent opportunity to achieve this by paying your EMIs on time.
Free up cash for other expenses
Since your EMI payments are lower due to a longer repayment tenure, you can free up cash for other planned and unplanned expenses. You can then use this extra amount towards your other obligations. For instance, if you have a credit card, a long-term loan with lower EMIs can help you put this additional amount towards its repayment. Moreover, you can also use this amount to invest in securities to earn higher returns for your long-term financial goals.
Ability to prepay the loan
A longer loan tenure might make you worried about the higher cost of the loan over time. However, if you have enough cash, you can easily prepay a part of your loan. A personal loan typically comes with a lock-in period, after which you can prepay a part of the outstanding amount. This will reduce the loan amount for the rest of the tenure, and you can conveniently repay it through lower EMIs.
However, most financial institutions levy a prepayment penalty. So, you must consider these charges before prepaying your personal loan.
Opting for a long-term personal loan is an ideal choice in these situations:
1. You are worried about timely EMI payments
If you're worried about covering the higher monthly payments and affecting your other financial needs because of it, it is better to go for a longer tenure as it will help ease the financial burden.
2. You need to manage other high-interest loans
If you have other high-interest loans or credit cards to take care of, a longer payoff period will be a wise choice. It will allow you to divert cash towards costlier debts and pay them off sooner.
A personal loan is a one-stop solution for all your urgent financial needs. That is why opting for a long-term personal loan will not only ease your financial burden significantly but also help you improve your affordability and take a higher loan amount.
Looking for an affordable personal loan with a transparent and hassle-free loan process? Tata Capital is a leading financial institution offering you multipurpose personal loans at attractive interest rates. With personal loans of up to Rs 35 lakhs and an extended loan tenure of up to 6 years, you can meet all your financial needs with manageable repayments.
Besides, Tata Capital's personal loans come with a simple application process and minimal documentation. Visit Tata Capital's website to check out their competitive loan offerings.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)