Consider this scenario: You need ₹5,00,000 for a family wedding and are exploring a small personal loan with an interest rate of 12% per annum. You’re deciding between two tenures—2 years or 5 years. How different would your EMIs be? Here’s a quick calculation:
- For 2 years: EMI = ₹5,00,000 × 0.094 (monthly factor for 12% over 24 months) = ₹47,000 approx.
- For 5 years: EMI = ₹5,00,000 × 0.022 (monthly factor for 12% over 60 months) = ₹11,000 approx.
The shorter tenure saves interest but results in a higher EMI. Over five years, the total interest is almost double compared to two years ago. Property prices in India’s top eight cities have surged by 20% in the same period, making long-term financial decisions even more critical.
But is it always wise? Let’s dive in.
Understanding Personal Loan Tenure
The tenure of your loan is the time you take to repay it. It impacts your EMI, interest outflow, and financial flexibility. A small personal loan often offers tenures from 12 months to 60 months, depending on the lender.
- Short tenures mean higher EMIs but less total interest.
- Long tenures mean lower EMIs but higher total interest.
For example, a ₹3,00,000 loan at 14% interest:
| Tenure | EMI (₹) | Total Interest Paid (₹) | Total Amount Paid (₹) |
| 1 Year | 27,000 | 24,000 | 3,24,000 |
| 2 Years | 14,400 | 45,600 | 3,45,600 |
| 3 Years | 10,300 | 69,600 | 3,69,600 |
| 5 Years | 7,000 | 1,14,000 | 4,14,000 |
The shorter the tenure, the lesser the total interest paid. But can your monthly income support higher EMIs? That’s where smart decisions matter.
Factors to Consider When Choosing Loan Tenure
Monthly Income and Expenses
First, look at your budget. How much EMI can you afford? For instance, if your monthly income is ₹50,000, limit your EMI to 40%, or ₹20,000. Avoid stretching beyond this.
Interest Rates and Total Cost
Interest compounds over time. A 3-year small personal loan of ₹4,00,000 at 11% may cost ₹72,000 in interest. For 5 years, it jumps to ₹1,20,000. Is the lower EMI worth this cost?
Financial Goals
Do you have big plans like buying a house or starting a business? Keep tenures shorter to free up funds for future investments.
Loan Amount
A ₹1,00,000 loan may work with a shorter tenure. But ₹10,00,000 might need a longer one to keep EMIs manageable.
Short-Term vs. Long-Term Tenures: Pros and Cons
Short-term tenures come with higher EMIs but save you money on interest. Long-term tenures reduce EMI stress but inflate interest costs.
- Short-Term Loan Benefits
- Faster repayment clears your debt quickly.
- Total interest saved is substantial.
- Great for borrowers with stable incomes.
- Long-Term Loan Benefits
- Manageable EMIs improve cash flow.
- Suits uncertain income scenarios.
- Ideal for large loan amounts like ₹8,00,000 or more.
Steps to Select the Right Loan Tenure
Follow these practical steps:
- Assess Your Finances: Calculate your income and expenses. Determine how much EMI you can afford.
- Use EMI Calculators: Online tools show EMI and total interest for different tenures.
- Compare Offers: Check lenders for interest rates and prepayment terms.
- Plan for Prepayments: Reduce tenure or interest by paying extra when you can.
- Think Long-Term: Ensure the tenure aligns with your financial goals.
Common Mistakes to Avoid
- Overestimating Repayment Ability: Don’t overcommit to higher EMIs and risk default.
- Focusing Only on EMIs: A lower EMI often means more interest paid over time.
- Ignoring Flexibility: Choose lenders offering prepayment without penalties.
- Not Using Calculators: You might choose an unsuitable tenure without clear numbers.
Conclusion
Choosing the right tenure for a small personal loan balances affordability and interest costs. Always plan with your financial goals in mind. Would you prefer quick debt clearance or comfortable monthly payments? Your decision will shape your financial future.
FAQs
- What is the best tenure for a small personal loan?
It depends on your EMI affordability and total interest you’re comfortable paying. - Can I change my loan tenure later?
Usually, no. Choose carefully before signing. - What happens if I prepay my loan?
Prepayment reduces either the tenure or interest cost, depending on the lender’s policy. - Does tenure affect my credit score?
No. Timely EMI payments, regardless of tenure, maintain your credit score.
