Applying for a Personal Loan is the simplest way to meet sudden financial requirements. There are two crucial factors to pay attention to when opting for a Personal Loan: interest rates and repayment tenure. Here is an insight into why you need to pick the right repayment term and how to choose the right deal.
Importance of picking the suitable tenure
Choosing the ideal Loan tenure is necessary to formulate an effective repayment strategy. This lets you repay your Loan amount comfortably. If you apply for Personal Loans of shorter tenure, you find yourself struggling to make repayments. If you apply for the Loan for a longer tenure, your interest liability increases.
When you pick the right duration, you can repay your Personal Loans hassle-free. This positively impacts your overall financial standing and increases your credit score.
Factors to consider
Monthly income
This is the primary factor to consider when deciding the term. It depends mainly on your ability to repay the Loan amount. If your monthly income is higher, you can quickly repay your Loan within a few months. You can opt for a shorter-term in this case. Hence, having a clear understanding of your monthly income is required. Do not forget to consider your existing financial liabilities and monthly spending.
Setting aside 20-30% of your monthly income for repayment is best. If you are confused, using an Equated Monthly Income or EMI calculator can help you decide. You need to enter the Loan amount, duration, and interest rates. The calculator comes with the estimated EMI payable within minutes. This determines your repayment capacity and tenure.
Loan amount
Your EMI amount depends on your Loan amount, which decides the duration. A higher Bank Personal Loan amount translates to a higher EMI. This means you need to repay the Loan amount. For example, you earn a monthly income of Rs. 25,000. You apply for a Loan of Rs. 2 lakh. Given your salary, you can repay the Loan within a year.
However, if you opt for a Loan amount of about Rs. 10 lakh, it takes time to repay the given amount. So, make sure you pick the tenure according to your Loan amount.
Interest rates
The Personal Loan interest rates depend on your Loan eligibility. For instance, if you apply with a reasonable monthly income and excellent credit score, the bank may offer the Loan at lower rates. A rate increases the total Loan cost and vice versa. Hence, always aim to get a lower interest rate. Generally, shorter tenure Loans are available at a lower rate. As your Loan term increases, your interest liability also rises.