The main reason to select the more extended repayment period for an individual loan would be to obtain the lowest EMI amount. This will reduce your personal loan interest rates throughout the loan and give you a greater chance of pre-closing your loan earlier.
Personal loans are ideal for borrowers who want to receive loans faster without collateral or margin requirements. There are no limitations on using the loan’s proceeds, and they require only minimal documents. The majority of banks and NBFCs offer personal loans with times of five years or more Some lenders also provide repayment terms of up to seven years. SBI, PNB, and Tata Capital are among the lenders offering personal loans with words greater than five years. Government employees can avail of credit from HDFC Bank for up to 6 years.
There are numerous aspects to consider when deciding whether to accept an extended repayment term. The repayment term’s length, interest rates, and financial security are all essential to consider.
Here are some reasons to consider a more extended period of repayment for any personal loan
Lower EMI Outflow If you can make the monthly installments smaller and by extending the duration, you can save money each month. This can also make your EMI affordable in the long run. After your finances stabilize, you can use the extra funds to close the loan more quickly. Since the interest component of your EMI will have been less, the overall interest burden will be less when you pay off your loan over a shorter period.
Option To Choose A Higher Loan Amount
Based on your debt-to-income ratio and the repayment length, a more extended period allows you to take out a more significant amount. If you have a more substantial income, consider the amount of your loan more than you would typically be eligible for to maximize your EMI. This will increase savings on your monthly budget as your EMI will be less, and you’ll be able to finish your loan earlier.
Most banks prefer a debt-to-income ratio of 35-40 percent in approving a personal loan. This means that your monthly debt repayments, past due EMIs, and current EMI must be in the range of 35-40 percent of your monthly income. Your DTI ratio could be decreased by settling for a longer loan duration because it improves your capacity to pay. It allows you to obtain larger loans.
Higher Chances Of Pre-Paying Your Loan
Extending the loan’s duration increases the likelihood of paying off the loan before reaching the final stages of repayment. The longer time frame for repayment can help you save more money and allows you to repay the loan earlier than it is due.
Most personal loans come with an initial lock-in period, after which you can repay a percentage of the loan. In the end, the amount of your loan will be reduced over the remainder of the term, and you will be able to repay it with fewer EMIs. However, most lenders charge a prepayment cost. So, it is essential to consider these fees before deciding to pay the personal loan off early.
Take Care Of Other Expenses Comfortably
If you pay a lesser EMI sum, you can free up funds for other costs of your business or family. This can help you control your expenses more effectively and boost the savings you earn each month.
It is essential to have an effective debt management strategy. It is important to realize that this personal loan might be one of many obligations, as you may have a mortgage or car loan and other obligations to pay each month. If you default on any of these loans could cause high-interest accumulation and additional fees. This is the reason why many people fall into the debt trap. Thus, choosing a long time to repay lets you make payments more evenly across various debts and expenses while not affecting your cash flow.
Helps Improve Your Credit Score
If you pay your EMIs punctually and on time, your repayment history appears excellent and can add some points to your credit rating. This can help you secure the best loan deal shortly.
Are There Any Drawbacks To Choosing A Longer Repayment Term On My Loan?
Sure, there are some.
1. High cost of interest – If you choose to take a longer repayment time, you must pay more interest over the duration of the loan, which can result in a higher interest cost. If you don’t make a prepayment on the loan, you could be paying higher interest than the initial amount.
2. It affects your chance of obtaining other loans because this loan is locked up your credit limit for an extended time; it can affect your chance of getting any other loans until the loan is fully paid off.
3. affects the credit score. It is a lengthy-term loan that affects your credit history and can affect the credit utilization ratio on your credit report, which can impact your credit rating. If you are applying for other credit cards or loans with your loan, anticipate your credit score to fall by a couple of points.
Conclusion
Choosing the repayment period of your loan is essential for a sound financial future. Selecting the longer term for repayment allows you to spread your repayments over other expenses and debts without impacting your monthly cash flow. In addition, when you pay less of an EMI quantity, it will be able to free up funds for the other expenses of your business or family. This can help you control your costs better and improve your monthly savings.
