Many times it becomes necessary to take a personal loan due to medical emergency, marriage or any other need. Whenever a person plans to take a personal loan, one of the most important decisions is to decide the loan tenure. This period directly affects your EMI .
If the loan tenure is longer, the EMI becomes less. On the other hand, in a shorter period, more EMI has to be paid. In such a situation, it becomes extremely important to create the right balance. If you want to reduce the EMI, then increase the loan tenure. According to the EMI, the tenure of your loan becomes less or more. Let’s understand how the choice of loan tenure and EMI impacts your pocket.
EMI and loan tenure
Suppose you take a personal loan of ₹ 3 lakh at an annual interest rate of 11%. If you repay it in 2 years, your monthly EMI will be ₹ 13,983. If you extend the tenure to 3 years, the EMI will come down to ₹ 9,821. For a tenure of 4 years, the EMI will be ₹ 7,754 and for 5 years it will be ₹ 6,522.
It is clear that as you extend the loan tenure, your monthly installment gets reduced, thereby putting less pressure on your immediate financial situation.
Effect of increasing or decreasing the loan tenure on EMI
If you extend the EMI, you can save a lot of money on interest. You can understand this better in the table below. If you take a personal loan of ₹ 3 lakh at an interest rate of 11% per annum, you will have to pay only ₹ 35,592 interest if you repay it in 2 years. But, if you extend the tenure to 5 years, your EMI will reduce. But, you will have to pay ₹ 91,320 as interest, i.e. ₹ 55,728 more. This clearly shows that a longer loan tenure reduces your monthly installment, but increases the total interest payment.
Increase EMI if you want to repay the loan quickly
Now suppose you want to take a loan of ₹ 7 lakh at an interest rate of 11%. In this case, the EMI for a tenure of 4 years is ₹ 18,092. If you want to repay it in 2 years, the EMI will increase to ₹ 32,621. On the other hand, if you choose a tenure of 18 months, the EMI can go up even further to ₹ 42,444. It is evident that a shorter tenure loan helps you repay the loan quickly, but for this, you will have to pay a larger monthly installment.
Be careful of prepayment charges
If you want to repay the personal loan before the stipulated period, the bank may levy a premature closure charge. This charge can range from 2% to 4% of the outstanding principal amount, on which GST will also be applicable. So, read the terms and conditions of the bank carefully before taking a loan. If there is any confusion, ask the bank and get it cleared. This wisdom can save you from unnecessary financial burdens.
Keep a balance between monthly income and expenses
Financial experts believe that while planning EMI, keep in mind the balance between your monthly income and expenses. It is wise to decide the loan tenure and amount in advance through the EMI calculator. If possible, keep the prepayment clause open to save interest. This valuable advice can help you make the right financial decision.