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    Home » Is a Personal Loan with a Longer Repayment Term a Good Idea?
    Finance

    Is a Personal Loan with a Longer Repayment Term a Good Idea?

    Ghiselle RoussoBy Ghiselle RoussoJanuary 31, 2023No Comments5 Mins Read
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    Getting a lower EMI is the best justification for opting for long-term loans. It will reduce the amount of interest you pay on your personal loan over its term and increase your chances of pre-closing the loan sooner.

    Personal loans are lifesavers for borrowers who want a quicker loan disbursement, no collateral or margin requirement, no limitations on how they can use the loan proceeds, and minimal paperwork. Lending institutions often offer personal loans with repayment durations of up to five years. However, some lenders can provide repayment periods of up to seven years. 

    Choosing whether or not to accept long term loans involves considering several different factors. You must take into account the length of payback, interest rates, and your financial security.

    Consider the following factors when choosing a longer loan term: 

    1. You Get a Reduced EMI Amount

    You can save money each month by lowering the monthly payments and lengthening the loan’s term. You can use the extra money to pre-close the loan more quickly. 

    Your overall interest burden will be lower if you pay off the loan sooner because the interest component of your EMI would have been lower. Use an EMI calculator to ascertain the best personal loan interest rates in India.

    2. You are eligible for a Higher Loan Amount 

    A longer payback time permits you to borrow larger loan amounts (depending on your debt-to-income ratio). Therefore, to maximise your EMI, you can consider taking out a loan for a larger sum than you might typically be eligible for if your income is higher. Since the EMI would be smaller and you can pay off your loan sooner, this will maximise your monthly savings. 

    Most lending institutions prefer a debt-to-income ratio of 35% to 40% when approving a personal loan. This means 35 to 40 percent of your monthly income should be spent on debt payments, past-due EMIs, and current EMIs if you have a debt to take care of. Selecting a longer loan term can lower this ratio since it improves your ability to make payments, allowing you to obtain bigger loans.

    3. You have a Greater Probability of Prepaying Your Loan

    You have a better chance of paying off the loan early if you extend the loan’s term before it enters the advanced repayment phases. Then, as you accumulate money over a longer repayment period, you can pay off more of your loan before it’s due.

    There is often a lock-in time before you can prepay a portion of your loan balance. As a result, you can conveniently repay the loan with reduced EMIs because the loan amount will be lower for the remaining time. However, a prepayment fee is levied by most lenders. Therefore, before paying off your personal loan early, consider these expenses.

    4. You can comfortably handle other expenses

    A smaller EMI payment leaves you with more monthly funds for other expenditures. You’ll be able to manage your spending better and boost your monthly savings as a result. Check personal loan interest rates in India for smaller EMIs.

    It is crucial for a more effective debt management strategy. You may have other debt obligations like a mortgage, a vehicle loan, or other monthly payments in addition to this personal loan. Any of these loans that are in default will accrue exorbitant interest rates and other fees. 

    Many borrowers become caught in a debt trap in this way. To spread your payments over different debts and costs without hurting your monthly cash flow, you can choose a longer repayment period.

    5. You Can Boost Your Credit Score

    When you make on-time EMI payments, your repayment history appears favourable, raising your credit score. It will enable you to negotiate better terms for future loans.     

    Disadvantages of longer loan repayment tenures

    Longer repayment terms for personal loans have some genuine benefits, but they also have some drawbacks. Listed below are a few of them:

    A loan with a longer term will accrue more interest over time. It’s simple – paying interest for more years will result in a larger overall debt. 

    Another drawback would be the time element – the time it takes for you to pay off debt will be much longer. But, for many people, financial freedom begins with paying off their debt. So, you can spend your money more freely when you aren’t concerned about making payments to creditors. 

    Further, your alternatives may be limited because lenders may not always offer personal loans with longer repayment options. Therefore, you run the chance of receiving a loan with unfavorable conditions like prepayment fees or a loan with a higher interest rate.

    So, a shorter payback period is typically the best choice if paying off your debt as quickly as possible is crucial to you.     

    Must Read: Why use a Personal Loan EMI Calculator?

    Conclusion

    Choosing the personal loan repayment period is essential for a secure financial future. You can stretch your payments over other obligations and expenses by selecting a longer payback term without impacting your monthly cash flow. A lesser EMI payment also frees up money for other impending costs for your family or business. Long-term loans help you better manage your spending and boost your monthly savings as a result.

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    Ghiselle Rousso

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