Loan tenure, or loan term, refers to the duration a borrower takes a loan from a lender. It is the period within which the borrower is required to repay the loan amount along with interest charged by the lender.
The loan duration or term might vary based on the type of loan, the lender, and the borrower’s creditworthiness. Generally, loan tenures can range from a few months to several years, depending on the loan amount and the borrower’s repayment capacity.
For example, if a borrower takes a home loan from a bank for Rs.50 lacs, the bank may offer a loan tenure of 15-20 years. This means the borrower must repay the loan amount and interest over 15-20 years.
Similarly, if a borrower takes a personal loan from a financial institution for Rs.1 lac, the lender may offer a loan tenure of 1-5 years, depending on the borrower’s repayment capacity.
The loan tenure or term also affects the amount of EMI (Equated Monthly Installment) the borrower must pay. EMI is the amount that the borrower is required to pay every month towards the repayment of the loan. The EMI amount is calculated based on the loan amount, interest rate, and loan tenure.
For example, if a borrower takes a home loan of Rs.50 lacs for 20 years at an interest rate of 8%, the EMI amount would be around Rs.43,700/-. On the other hand, if the borrower takes the same loan for a tenure of 15 years, the EMI amount would be around Rs.49,400/-.
Advantages for obtaining credit for long Loan Tenure
Obtaining credit for the long term can have several advantages for borrowers. Here are some of the advantages of getting credit for the long term:
Lower EMI:
When a borrower takes a loan for a longer term, the EMI amount is lower compared to a loan with a shorter tenure. This is because the loan amount is spread over a more extended period, reducing the borrower’s EMI burden.
For example, if a borrower takes a home loan of Rs.50 lacs for 20 years at an interest rate of 8%, the EMI amount would be around Rs.43,700/-. However, if the borrower takes the same loan for 10 years, the EMI amount would be around Rs.61,000/-.
Better cash flow management:
Lower EMI amounts for loans with longer tenures can help borrowers manage their cash flow better. They can use the money saved on EMI payments to meet other financial obligations or invest in other opportunities.
For example, if a borrower takes a personal loan of Rs.1 lac for a tenure of 1 year, the EMI amount would be around Rs.8,830/-. However, if the borrower takes the same loan for a term of 3 years, the EMI amount would be around Rs.3,440/-. This would provide the borrower with better cash flow management as they would have more money available for other expenses.
Higher loan eligibility:
Borrowers who opt for longer loan tenures may be eligible for higher loan amounts as the EMI amount is lower. This is because lenders consider the borrower’s repayment capacity while determining the loan amount.
For example, if a borrower has a monthly income of Rs.50,000/- and takes a personal loan for a tenure of 1 year, they may be eligible for a loan amount of around Rs.5 lacs. However, if they opt for a loan tenure of 3 years, they may qualify for a higher loan amount of around Rs.10 lacs.
Better credit score:
Taking a loan for a longer tenure and making timely payments can help improve the borrower’s credit score. This is because timely payments over a more extended period indicate financial discipline and responsibility, which lenders view positively.
Disadvantages for obtaining credit for long Loan Tenure
Obtaining credit for the long term can have certain disadvantages as well. Here are some of the disadvantages of obtaining credit for a long term:
Higher interest cost:
Loans with longer tenures often have a higher interest rate than loans with shorter terms. This is because lenders consider the risk of default over a longer period of time and charge a higher interest rate to compensate.
For example, if a borrower takes a car loan of Rs.5 lakhs for a tenure of 3 years at an interest rate of 9%, the total interest paid would be around Rs.54,000/-. However, if the borrower takes the same loan for a tenure of 5 years at an interest rate of 11%, the total interest would be around Rs.1,06,000/-.
Longer debt burden:
A longer loan tenure means the borrower will have to carry the debt burden for longer. This can impact the borrower’s financial planning and may cause them to fall behind on other financial goals, such as retirement planning or preparing for a down payment on a property.
For example, if a borrower takes a personal loan of Rs. 2 lakhs for a tenure of 2 years, they would have to pay a total interest of around Rs.20,400/-. However, if they opt for a loan tenure of 5 years, they will have to pay a total interest of around Rs.51,000/-. This means that the borrower will have to carry the debt burden for longer, which may affect their financial planning.
Lower equity:
Loans with longer tenures often result in lower equity in the financed asset, such as a house or a car. This is because the borrower is paying a higher interest amount, and the principal amount is being paid slower.
For example, if a borrower takes a home loan of Rs.50 lacs for a tenure of 20 years at an interest rate of 8%, they will end up paying around Rs. 86 lacs towards interest over the loan tenure. This means that the equity in the house would be lower compared to a borrower who takes the same loan for a term of 10 years.
Lower credit score:
Taking a loan for a longer tenure and making late payments or defaulting on payments can negatively impact the borrower’s credit score. Lenders view late payments and defaults as signs of financial instability and irresponsibility.
In summary, loan tenure or loan term refers to the duration for which a borrower takes a loan from a lender, and it can vary depending on the type of loan, the lender, and the borrower’s creditworthiness. The loan tenure affects the amount of EMI the borrower must pay for the loan repayment.