The ideal repayment period for your personal loan depends on many factors, such as your goals and financial situation. Selecting a shorter payback period—12–36 months, for example—leads to lower total interest payments because interest accrues more quickly. Additionally, you’ll pay off debt faster, which will free up money for other financial objectives. However, if your income is restricted, the equated monthly installments (EMIs) would be higher and could cause financial strain.
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Greater payback periods (36–60 months or longer) result in lower monthly installments, which facilitate better monthly budget management. But, since the loan is disbursed over a longer period, you will end up paying more interest overall and incurring debt for a longer period.
Factors affecting repayment tenure
Key components of any loan and repayment terms significantly influence your borrowing experience. This is the reason they matter:
Duration of repayment term: Your monthly EMI is directly impacted by the length of your repayment term. Greater EMI payments are associated with shorter terms, which enables you to pay off debt earlier. Extended periods necessitate a longer repayment period but have lower EMIs. Pick one that is in line with your budget.
Interest rates: Shorter repayment terms frequently result in lower interest rates. However, your total interest expense might be higher because you have fewer payments to spread the interest over. Due to the increased number of payments, longer durations may have slightly higher interest rates overall, but the cost of interest may be less overall.
Term alignment with goals: Tailor your payback period to achieve your desired financial outcomes. Shorter terms allow for more budget flexibility and are better suited for short-term objectives like emergency fund savings. Long-term goals might necessitate a longer term with lower EMIs, like a down payment on a home.
Penalties for early repayment: Early repayment of certain loans may result in penalties. Select a loan with no prepayment penalties or a shorter term to take advantage of the lower interest rates if you intend to return the loan early.
Risk assessment: Determine your risk tolerance through risk assessment. Selecting a shorter term could be helpful if you want to pay off your debt as quickly as possible. A longer term, on the other hand, might be more appropriate for you if you decide to pay less each month even though the interest rate will increase over time.
Factors to consider when selecting a personal loan term
When deciding on a personal loan term, these are some critical factors to take into account.
Watch your budget and affordability: This is the most crucial element. Choose a term that will allow you to pay the monthly EMI comfortably without going over your budget. Select a term that won’t force you to give up on other financial commitments.
Interest rates and total interest cost: Interest rates for short terms are frequently lower. This incentivises the borrower to make faster repayments. It’s possible that overall interest expenses won’t always be less. Your total interest expense may be higher than it would be for a longer term with a slightly higher interest rate because you will have fewer payments to spread the interest over.
Loan amount: Longer repayment terms are typically required for larger loan amounts to maintain a manageable monthly interest rate. But a longer term means you’ll be paying interest for a longer period, which increases the total cost of borrowing money.
Make use of a loan calculator. Personal loan calculators can be found online from many lenders. You can use these calculators to see how different loan amounts, interest rates, and repayment schedules affect your monthly installment amount and total amount of interest paid.
Financial objectives: Selecting a shorter loan term will enable you to pay off your debts more quickly and free up cash sooner for short-term objectives like setting up an emergency fund or paying off credit card debt. A longer loan term with lower EMIs may help you achieve long-term goals like saving for a down payment on a home by allowing you to spread out the repayment over a longer period.
There’s no one-size-fits-all answer when it comes to the ideal payback period. You should carefully consider your goals and financial situation before making a decision. A financial advisor can offer tailored guidance based on your unique circumstances.
Frequently Asked Questions (FAQs)
Q. Is it possible to change the term length of your personal loan?
A personal loan that is already in place typically cannot have its terms changed instantly. On the other hand, you might be able to refinance your loan and get a new one with a new term. The interest rate and repayment period are usually locked in when loan agreements are signed. The loan term may be extended to make up for any missed payments if your lender permits you to suspend payments because of financial difficulties temporarily.
Q. Can a personal loan be settled before the scheduled term ends?
You can repay your personal loan ahead of schedule by either making larger payments than the monthly requirement or by submitting additional payments during the month. While many lenders do not impose a prepayment penalty, it’s advisable to review the loan agreement for confirmation.
Q. What is the typical repayment period for a personal loan?
Repayment terms for personal loans typically range from two to seven years, though they can change based on the lender.
Q. What are the consequences of missing a payment on my personal loan?
Failure to make a payment on time may result in late fees and a report to credit bureaus, which may lower your credit rating.
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Try your hardest not to miss any payments. Get in touch with your lender if you’re having trouble paying your loan. They might be able to offer options for hardship.
