Choosing the Right Loan Tenure: Balancing EMI Affordability and Loan Cost

For anyone starting a financial journey, whether buying a home, or car or paying for higher education, choosing the best loan tenure is crucial. It’s a decision that demands serious thought because it can significantly impact one’s monthly budget, financial security, and overall borrowing costs. 

Striking the right mix between EMIs and reducing the overall loan cost is essential to prevent the loan from becoming a burden rather than a help. Understanding the subtleties of loan tenures is necessary in this complicated financial environment because it enables people to make decisions that align with their financial objectives and capabilities.

Every loan taken must be repaid, and the period you choose to do so is referred to as the loan tenure. The borrowers must repay the principal and interest to the lender within this time limit. The loan tenure varies depending on the type of loan taken. 

For instance, a personal loan may have lower assignments than a housing loan. In addition, the loan tenure will also depend on the amount borrowed and the lender’s policies. 

One should consider different factors before choosing a suitable tenure for their loan. You can view the elements given below and decide accordingly whether you want a long or short term:

Once you take the amount, the first thing that is checked is the EMI amount. Although you can check the same using an EMI calculator, your lender will share the amount. The lender will tell all the EMI options along with the tenure. You can decide the term of your loan based on the EMI amount.

It is complex to take out a loan and repay it. You need to plan it carefully by assessing your monthly income and expenditure. After the calculations, you can determine the amount you can pay towards EMI. 

You can even use an EMI calculator to figure out the amount. The lower the EMI, the higher your tenure will be, which, for some people, will be manageable.

ROI plays a very vital role in deciding the tenure of any loan. If the lender charges a higher interest rate, you must pay a higher interest amount over the loan tenure. Therefore, you need to decide the term based on the same. The longer the loan tenure, the more interest you will pay towards your loan.

Sometimes, a person has to take a loan for an immediate requirement and hence does not want to extend the period. If your financial goal is to remain debt-free, you should go for a shorter tenure; however, it will increase the EMI amount. 

If you are comfortable managing your monthly expenditures with an EMI longer, you can go for a more relaxed loan tenure.

Many lenders allow the borrowers to clear the amount by going for prepayment or foreclosure of their loan. If your lender is offering the same, check if any penalties or fines are attached. Once you know how much extra you may have to pay, you can decide to go for a short or extended tenure.

  • Loan Tenure and EMI Relation

Just as it is essential to consider the loan tenure, it is imperative to consider the EMI cost. Before deciding on the term, check the amount you must pay. You should also know that if you choose a longer tenure, the EMI amount may be less, but eventually, you will have to pay a higher interest cost.  

Let’s understand this through two different examples. Through these, you will know how much interest you will pay with shorter and longer loan durations. You can even use an EMI calculator to figure out the below easily:

Example 1:

Person X borrows INR 5 lakhs for three years at an interest rate of 10%; the EMI will be calculated as below:

EMI = (P r (1 + r)^n) / ((1 + r)^n – 1)

P = 5,00,000

R = 10%, which will be annual/12 = 10%/12 = 0.833 per month

N = 3 *12 = 36 EMIs

EMI = (5,00,000 0.00833 (1 + 0.00833)^36) / ((1 + 0.00833)^36 – 1) =Rs. 16,134 

The total interest for three years will be INR 80,809.

Example 2:

If the same person borrows INR 5 lakhs for two years at the same interest rate, below will be the calculations:

EMI = (P r (1 + r)^n) / ((1 + r)^n – 1)

P = 5,00,000

R = 10%, which will be annual/12 = 10%/12 = 0.833 per month

N = 2 *12 = 24 EMIs

EMI = (5,00,000 0.00833 (1 + 0.00833)^24) / ((1 + 0.00833)^24 – 1) =Rs. 23,072

The total interest for two years will be 53,739.

The above examples depict that despite the higher loan tenure, the overall amount that the borrower will repay will be more. The EMI may look less initially, but the total repayment amount will eventually increase. Therefore, when deciding whether to go for a longer or shorter loan tenure, the borrower should always consider EMI, interest cost, and other factors.

In conclusion, it is essential to carefully analyse your financial condition, goals, and preferences when choosing a suitable loan tenure. Although choosing shorter loan terms may save you money over time by cutting the overall amount of interest paid, it may result in higher EMIs that may burden your monthly budget. However, lengthier terms may result in more significant overall borrowing costs while providing more affordable EMIs. 

The key is finding a balance that suits your needs and guarantees you can pay your EMI responsibilities quickly without endangering your financial stability. It’s important to remember that the appropriate loan tenure is a personalised decision that considers your specific financial situation and goals. 

You can successfully negotiate the intricacies of loan tenures to meet your financial goals by carefully assessing the advantages and downsides, speaking with financial professionals, and remaining committed to prudent financial management.