Personal loans offer flexibility in terms of repayment. The payment structure offered on a personal loan can be as short as a couple of months or one may be given an option to stretch their payments over a period of time. However, there are certain advantages and disadvantages associated with longer repayment terms when it comes to availing of personal loans.
One generally selects a longer repayment tenure as it lowers the monthly EMI or payment to a great extent. The pressure for repayment of personal loans is also reduced due to this. This may in reality make the loans more expensive than they actually are.
How does a personal loan EMI calculator function?
- The personal loan EMI calculator allows the applicant to see how varied loan terms affect our overall monthly cost to incur that loan.
- We just need to fill in the total personal loan amount that we intend on taking, the interest rate to be charged and the tenure of the personal loan.
- The personal loan EMI calculator automatically works out the monthly payment that we would have to incur to procure the personal loan.
What are the Pros of longer repayment terms on personal loans?
- Lower monthly payments:
- Personal loans are spread out over a longer period of time and hence monthly payment gets reduced
- For example, if Mr. A opts for a $10,000 personal loan at 10% interest with repayment timeline being 3 years, the monthly payments of Mr. A would be $323 per month.
- Now, consider an example that Mr. A is a believer of longer repayment terms on personal loans.
- In that scenario, Mr. A chooses to pay off the personal loan over eight years.
- Here, monthly payments are as minimal as $152 per month, freeing up almost $171 monthly.
- Increased flexibility:
- If you have availability of spare cash, then you can choose to make extra payments
- Here we need to check with the personal loan provider whether or not there is a prepayment penalty if the loan is repaid earlier than the tenure period.
What are the Cons of longer repayment terms on personal loans?
- Accumulating higher interest charges during personal loan tenure:
- Continuing with the example of Mr. A, the longer personal loan tenure he wishes to opt for more will be the personal loan interest accumulated.
- If he went on from a three years tenure to an 8 years personal loan plan then obviously he would have to shell out additional interest expenditure for 5 years.
- Higher personal loan interest rate:
- Length of the loan is one factor detrimental in deciding the personal loan interest rate by personal loan lenders.
- If the period is longer, it becomes riskier for lenders as there is a high possibility that interest rates may hike and fluctuate.
- Risk also increases that since the future is uncertain something may go wrong, and the borrower may not be in a position to repay the loan.
- To safeguard themselves from the above risks, lenders charge higher personal loan interest rates from borrowers.
- You will take a substantially longer time to be debt-free:
- We all have a future to build for ourselves and our loved ones.
- Being financially independent by becoming debt-free is one of the most prominent goals of the people.
- It allows us to be stress-free as we become more flexible in terms of deciding what to do/how to invest our savings when there are no creditors lingering around
- There aren’t many lenders in the market willing to lend money at an extended period
- In such a case people tend to settle with a higher interest rate or with unfavorable terms – read prepayment penalties
- That becomes one of the biggest disadvantages of longer repayment of personal loans
Under several circumstances, disadvantages take a leap over the advantages while one chooses to opt for longer repayment terms on personal loans. If becoming debt-free at the earliest will take you an inch closer to your dream of being financially stable, then you should give this careful thought.
It is crucial to plan your finances well and have more room in your budget to build the future. This is why shorter repayment periods are ideally preferred by both lenders and borrowers and it meets both of their end goals.