Everything You Need to Know About Personal Loan Tenures

A personal loan is a convenient way to secure fast funds, finance large purchases, and consolidate debt. But is it better for you to pay the loan off in a few months, or stretch it out for years?

When applying for a personal loan, it’s important to know how the loan tenure affects your interest rate, budget, and repayment plan. Let’s go over what you should know about personal loan tenures so you can choose the tenure that suits your needs best.

Definition of loan tenure

The loan tenure refers to the period between the disbursal of funds into your account and your final equated monthly installment (EMI), which is basically the monthly payment you make to repay your loan.

The loan tenure influences the interest rate on your loan. A longer tenure typically means a higher interest rate, so you would pay more money over the life of the loan. However, this can be necessary because it can make each monthly payment cost less.

Types of loan tenure

There are two main types of loan tenure: fixed and flexible.

Fixed tenure

The repayment schedule of fixed tenure is fixed, as the name suggests. When you sign the loan agreement, you consent to the repayment schedule, as well as any other terms and conditions specified.

A fixed tenure usually gives you anything from 12 months to 5 years to finish repaying the loan. Most loans require you to make fixed monthly payments.

Flexible tenure

Flexible tenures are sometimes referred to as flexi loans. Unlike a fixed loan tenure, a flexible one grants the borrower more freedom. There are usually no prepayment penalties, which means you can make early payments without incurring extra fees.

Factors that affect loan tenure

Income

The steadier your income and the lower your debt-to-income ratio, the more likely a lender will be willing to approve a longer loan tenure.

Age of the borrower

Your age can influence the loan tenure you get for your personal loan. Typically, lenders are more willing to grant longer loan tenures to younger borrowers.

How old the property is

Home loan tenures in particular are affected by the age of the property. Lenders typically don’t want to give out home loans for a property that is old and losing value. For that reason, loan tenures might be affected by your property age.

Longer loan tenure pros and cons

Advantages of a longer loan tenure

Lower monthly payments: When you take out a loan, the longer the loan tenure, the more time you have to repay the loan amount plus interest. A long loan tenure could drastically reduce your monthly payment amount, making it easier for you to stay on top of your loan repayment.

More freedom to use your money: Since you get lower monthly payments and ample time to repay your loan with a longer loan tenure, you should have more cash each month. This enables you to better manage obligations such as credit card debt, investments, groceries, and other necessities.

Greater repayment flexibility: Longer loan tenures don’t mean you are obligated to take the entire duration before you finish paying off the debt. You can also choose to prepay. Prepayments are extra payments that allow you to finish paying your debt before your loan tenure is over. While some lenders have prepayment penalties for paying the personal loan off early, others don’t, which means you get extra flexibility.

More breathing room if you have urgent needs: Many people take out personal loans when there is a pressing need for funds. For example, medical loans and debt consolidation loans can be invaluable. When you’re in a tight spot, there are often things more urgent that need your attention than paying back this loan. In cases like this, you might benefit from a longer loan tenure, which gives you more time to focus on other commitments.

Disadvantages of a longer loan tenure

Need to pay more in interest: A longer loan tenure means that even if you have a low interest rate, what you pay in interest can accumulate to a significant amount over time. Even though a long loan tenure can give you more time to repay the loan, it’s not necessarily optimal for every borrower.

Longer time in debt: It can be stressful to know you have a loan to pay off that takes years.

Lenders may increase interest: Some lenders are more cautious about giving a loan to someone who will take a longer time to repay it. Lenders might give you higher interest rates if you want a longer loan tenure.

A limited selection of personal loans: Some lenders will not approve of long loan tenures due to the added risk of not getting the loan repaid. If you want a longer-than-typical loan tenure, you can expect fewer lenders to offer you options. The disadvantage of this is you might end up agreeing to unfavorable terms and conditions, especially if you are in a pinch and need the lump sum loan urgently.

Shorter loan tenure pros and cons

Advantages of a shorter loan tenure

Less accumulated interest: Since you finish your repayment sooner, you won’t have to pay as much interest over the life of the loan. Assuming the interest rate remains the same regardless of loan tenure, this helps you save money on the whole.

Easier approval: Many lenders are more likely to offer personal loans with shorter tenures to you. If your credit score is suffering, a short-tenure loan can be easier to obtain.

Disadvantages of a shorter loan tenure

Higher monthly payments: Some borrowers will struggle to make the more expensive monthly payments of short-tenure personal loans. This can lead to late fees and penalties, which can be costly and even damage your credit score.

Lower loan amount: Lenders who offer short loan tenures often only allow you to take out a relatively small personal loan. If you want a large loan amount, lenders typically will not let you choose a shorter loan tenure because they expect it to take you longer to repay.

Less repayment flexibility: If you choose a shorter loan tenure, you might feel burdened by the need to pay back the debt through regular, on-time payments.

How to choose the right loan tenure

While everyone has unique financial needs and challenges, there are some things to keep in mind that could help with choosing the right loan tenure.

1. Know your monthly budget

Before committing to a particular loan tenure, it can be helpful to forecast your budget for the following months. How much of that budget can you afford to allocate to repaying your loan each month? After you have a good estimate, you can more accurately judge what loan tenure will fit your needs.

2. Review the loan amount

In general, it’s advisable for borrowers to choose a short loan tenure if they obtained a small loan amount. Personal loans require regular attention so you don’t miss a payment and can afford the interest. The sooner you can pay off a loan, the sooner you don’t have to worry about it anymore.

On the other hand, if you took out a mortgage, auto loan, medical loan, or another large loan amount, it might make more sense to choose a loan tenure of numerous years. This way, there is no rush to pay it off within the year.

3. Consider the interest rate

Lenders have to indicate essential details of the loan, such as the interest rate and what extra fees they might charge you. A loan calculator can give you a clearer understanding of your ability to repay the loan. It’s important to be aware that even though a longer loan tenure lets you pay less each month, it also means you might be paying the accumulated interest costs for many years to come.

4. Assess your obligations

Do you have existing debt or financial commitments that require your resources? If so, you should be aware of them as you choose your loan tenure.

Common monetary obligations include:

• Credit card debt
• Other personal loans
• Business loans
• Alimony

5. Judge your financial situation

Whether you have a steady income or not can greatly impact your loan tenure. Naturally, if you have a consistent stream of money in the form of wage paychecks, it may be easier for you to repay your loan more quickly. In that case, a shorter loan tenure might help you avoid the accumulation of interest over time.

Meanwhile, if you don’t have cash or liquid assets, a longer tenure allows you to pay more affordable monthly installments. Many people need a personal loan if they have lost a means of income. A longer tenure might be able to assist with financial relief.

6. Make sure you can still handle emergencies

It’s important to try and choose a loan tenure that allows you to handle any emergencies that come your way. Having an emergency fund set aside can be a good idea, and that becomes harder to manage if you are just barely making enough to repay your loan each month.

The ideal loan tenure allows you to make monthly installations comfortably.

How to negotiate loan tenure with lenders

If you have a stellar credit score, it naturally becomes easier to negotiate with lenders because they view you as more creditworthy. In general, when you’re bargaining with a lender, persistence and politeness are important to keep in mind.

In addition, it is typically important to remain honest about your credit records and financial situation. This is because if the lender discovers you have been lying or given inaccurate information, they might no longer be willing to compromise with you.

As long as you have a clear, reasonable explanation for why you want a certain loan tenure, you can likely raise your chances of successfully negotiating loan tenure with prospective lenders.

How to manage loan tenure for financial stability

Everyone faces individual financial needs and challenges, so it is impossible to give any official financial counsel in this article. However, here are some common strategies people have used to better manage their loan tenure for financial stability.

1. Budget well

Budgeting is a financial skill that can be learned and mastered over time, but it can understandably be a stressful process. Creating a clear budget for each month and year can help you see whether you will be able to make on-time payments with the current loan tenure and loan terms.

2. Negotiate with the lender proactively

Some lenders are willing to compromise with you and either increase the loan tenure or allow you to make prepayments and repay the loan early.

Being proactive is critical when it comes to negotiating terms with your lender. If you expect a change in your financial situation and ability to make full loan payments in the next few months, it may help to contact your lender as soon as possible. Borrowers who explain the situation with the intent to repay the loan in more manageable terms may find their lenders more tolerant of the change.

Of course, it is never a guarantee that a lender will agree to increase the loan tenure, but many lenders prefer a longer loan tenure over a borrower defaulting on the loan.

3. Use a loan calculator

Using an EMI and loan calculator can give you a clearer view before you commit to any loan tenure. This insight into how much you will have to pay each month over the life of the loan can help you adjust your expectations going into a loan.

The better aware you are of how much money you need to repay for taking out a loan, the more likely you can maintain financial stability.

Final thoughts

Your personal loan tenure is how long you will have to repay the loan. Since it affects your interest rate and regular monthly payments, it’s essential to choose a tenure that suits your needs so you don’t default on your loan or hurt your credit. Whether your tenure is less than 12 months or more than 5 years, remember to take the time to consider carefully before you commit.

About The Author

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.

Articles by Ru Chen

---