Longer Tenure Or Higher EMI On Personal Loan Take Your Pick

Jyoti is looking for a personal loan. Out of the five banks considered a couple look good to her and hence she is thinking of choosing between these two offerings. One factor that has been at the back of her mind is the time period for the repayment of the loan. She would prefer a longer time period, as this will enable her to slowly recoup the money from her earnings and complete her payment requirement. One of the two banks offers loan tenure up to 7 years and Jyoti is wondering whether there is any additional point that she needs to consider.

Analysis
The time period for the repayment of a loan is a very important factor. It will determine the amount of the equated monthly installment (EMI) a borrower will have to pay. Also, the lower the interest rate the better it is for a borrower because his/her cost for the entire loan will be lower. This is why everyone shop for lower interest rate offerings

A borrower needs to see whether there is a higher cost involved for a longer repayment period. In the above case, Jyoti will have to check the rates for various repayment tenures; the bank is offering a maximum term of 7 years. This is important because this offering might have an interest rate higher than the other bank, which can make a significant difference over the life of the loan.

In this kind of situation, the overall cost of the loan will increase. For example, if Jyoti is looking for a personal loan of Rs 1 lakh to be repaid in 3 years when the interest rate is 16 per cent then the EMI will work out to Rs 3,515 and the total interest to Rs 26,565. But when with the same figures the repayment period is stretched to 7 years, the EMI will become Rs 1,986 but the total interest figure balloons to Rs 66,840. Remember, the moment the period is stretched even with the same interest rate there is a larger amount that is paid as interest because of the increase in the total payments.

If interest rate change is brought into the picture, the impact can be even more severe. This is because apart from the longer time period for which the interest will be charged the higher interest rate will also mean a higher amount that has to be apportioned each year over the life of the loan. In the example if the interest rate climbs to 18 per cent then the total interest payment over the 7-year life will come to Rs 76,550.

Sometimes, a particular bank gives loan at a higher interest rate than that of other institutions. This higher rate could be for all the offerings as compared to some other banks. If Jyoti sees this kind of situation then she might want to stick to a lower repayment period offering because the savings in the interest rate will be substantial considering the difference in the rate.

Banks on their part could have this kind of varied offering as it will enable them to earn a higher amount, especially where there is a large demand.

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