When considering a personal loan, one key factor to evaluate is the loan tenure, which refers to the repayment period agreed upon between you and the lender. Understanding the differences between short-term and long-term tenures is essential for selecting the option that best suits your financial situation.
Short-term personal loans typically have a minimum tenure of 10 to 12 months, though this can vary by lender. Opting for a shorter loan term can be advantageous for individuals with higher monthly incomes, as it generally offers lower interest rates and allows for quicker repayment. This approach can lead to less overall interest paid and a faster return to financial freedom.
In contrast, long-term personal loans usually extend up to five years, depending on the lender’s policies and your credit score. A longer tenure can be beneficial for those with lower monthly incomes, as it spreads the repayment over an extended period, resulting in more manageable monthly instalments (EMIs). This can alleviate the financial burden of high EMIs and provide more breathing room in your budget.
Parameter | Short term tenure | Long term tenure |
Duration | Normally range between 10 months to 12 months. | Normally range between 1 to 5 years. |
Interest rate | It tends to have lower interest rates. | It leads to a higher interest rate as the duration is more. |
Benefits | Beneficial for borrowers who borrow a little amount and wish to promptly return the loan. | Beneficial for borrowers who can make monthly payments and wish to pay slowly. |
Effect on EMIs | High EMIs amount. | Low EMIs amount. |
Suitability | Best for high-income individuals. | Best for low-income individuals. |
When choosing the duration of your personal loan, it's essential to evaluate several key factors:
Clear objectives: Reflect on the purpose of the loan. For instance, if you're borrowing for a short-term goal like a vacation, a shorter loan tenure may be more appropriate. Conversely, for long-term objectives such as home renovations or pursuing higher education, a longer tenure could be beneficial.
Monthly payments: Assess your monthly income and expenses. A shorter loan term results in higher monthly payments, which can significantly impact your budget. Utilising a personal loan EMI calculator can provide a clearer picture of your financial capacity and help you determine if you can comfortably manage the monthly payments.
Interest rate: The interest rate on personal loans can vary based on the loan term. Typically, long-term loans have higher interest rates, which means you may end up paying more over the life of the loan.
Making an informed choice about your loan tenure can enhance your credit score, reduce interest payments, help you meet other financial goals, and facilitate manageable monthly repayments.
Ashish Tiwari, Chief Marketing Officer of Home Credit India, emphasises, “When deciding between a long-term or short-term tenure for a personal loan, the choice depends on your financial situation, repayment capacity, and long-term goals. A short-term tenure comes with higher EMIs but allows you to repay the loan faster, resulting in lower total interest payments and quicker debt clearance.”
He continues, “Whereas, a long-term tenure offers lower monthly EMIs, making it easier to manage your cash flow. However, the total interest paid over time will be higher since the loan is spread over a longer period. If you prefer more flexibility in managing your finances and want to keep your monthly obligations lighter, a longer tenure may suit you better.”
When applying for a personal loan, it's crucial to decide between a short-term or long-term tenure. Taking into account all the important factors will enable you to handle your personal loans more effectively and achieve your financial goals.
Additionally, consulting with financial advisors or conducting thorough research can provide valuable insights into personal loans, helping you navigate any associated risks.
