Personal loans have become very popular of late because of the simple procedure to avail one. At most times, pre-approved personal loans are available. Personal loans can serve individuals in case of medical emergencies, higher education, travel plans, etc. However, even though it is very convenient for individuals to get a personal loan, it is vital to understand how a personal loan works and its repayment process. A personal loan is a form of an unsecured loan which has a repayment tenure that is flexible and can be chosen by the individual as per their capabilities.
The repayment duration usually varies from 1 year to 5 years. It is important to make sure you choose a tenure where the interest that is being paid does not cross the principal amount. Choosing a personal loan with a short repayment duration will lead to high Equated Monthly Instalments (EMIs), but the interest rates will be low. Similarly, opting for a personal loan with a long repayment tenure will make the EMIs low but the interest rates high.
Given below are some of the points that individuals must consider when choosing the repayment period of a personal loan:
- Rate of interest: The rate of interest of a personal loan will depend on your credit score. Individuals who have a good credit score, have not made any late payments, and have a good credit history usually get personal loans with a low rate of interest. Lenders feel that individuals with a good credit history will pay back the EMIs on time and hence feel the risks are low when providing a loan to such individuals. In case you are offered a personal loan with a low rate of interest, it is wise to choose a short repayment duration.
In case your credit score is bad, it might be wise for you to opt for a longer repayment duration. High interest rates with a short repayment tenure can lead to high EMIs which you might not be able to afford. Usually, the interest rates of personal loans are between 11% and 24% p.a. In certain cases, the interest rates could also be higher.
- Loan amount: The amount of the personal loan must be one of the main factors to consider when choosing the repayment tenure. In case the loan amount is less, it is wise that you opt for a shorter repayment duration. The longer the loan duration is, the lesser the EMIs are, however, the interest rates will be high. Therefore, to avoid paying a high interest rate for a low loan amount, it is important to opt for a shorter loan tenure.
However, in case the loan amount is high, choosing a longer loan repayment would be smart. Choosing a high long duration will also bring down the EMIs and give you the option to pre-close the loan by paying a low pre-closure charge. In case your salary is high, it would be wise to opt for a shorter loan duration as you would be able to save on interest.
- Budget: It is vital to check how much you would be able to pay a month when you choose the loan duration. In case your expenses are high, it would be wise if you opt for a longer loan duration. Opting for a shorter loan duration under such circumstances could cause a financial burden. Even though the interest rates are high, if individuals choose a long loan duration, the EMIs would be low and it would allow individuals to save money which can be used to pre-close the loan. Therefore, it is very important to know the amount of money you are spending every month and your budget before choosing a loan duration so that there is no financial burden caused.
It is vital that you understand how a personal loan works before availing one. The terms and conditions must be read through thoroughly before signing the documents. Comparing personal loans from multiple banks and non-banking financial institutions (NBFCs) is also important. Different banks and NBFCs may offer the same amount of loan at different interest rates, therefore, comparing them is vital. Personal loans offered by different NBFCs and banks can be compared on multiple third-party websites to choose the right personal loan.