Why a Personal Loan with a Longer Repayment Term could be a Better Choice

Personal Loan is an ideal option for borrowers looking for faster loan disbursal, no requirement of collateral/margin amount, zero restriction on end-usage of loan proceeds (except for speculation purposes) and minimal documentation. Most banks and NBFCs offer personal loans for tenures of up to 5 years, with some lenders providing a repayment term of up to 7 years. Some of the lenders offering personal loans of more than 5 years include SBI, PNB and Tata Capital. HDFC Bank allows personal loan tenures of up to 6 years to government employees.

Here we will discuss the pros and cons of availing personal loans with longer tenures.

Benefits of Longer Repayment term for personal loans

Lower EMI burden

Borrowers opting for personal loans for longer tenures have the convenience of reduced monthly payments. Lower EMIs allow borrowers to take care of their planned and unplanned expenses apart from making investments to fulfil their long-term financial goals. It also reduces the risk of EMI defaults.

Bigger loan amount due to lower EMI/NMI Ratio

EMI/NMI ratio refers to the total proportion of a personal loan applicant's net monthly income (NMI) used for servicing the EMIs. While calculating this ratio, lenders consider both the existing EMIs of the loan applicants and their EMIs of their proposed loans. Banks and NBFCs usually prefer to lend to personal loan applicants having their total EMIs, including the EMI of the proposed personal loan, within 55-60% of their monthly income. Thus, availing a personal loan with a longer repayment tenure can help in keeping his EMI/NMI ratio within the acceptable range and improve his chances of availing personal loan of a higher loan amount.

Increased chances of on-time EMI payments

Lower EMI obligation reduces the stress on one's personal finances through higher disposable income. This helps in reducing the chances of EMI defaults during periods of unforeseen financial exigencies. On-time payment of EMIs have an added advantage for borrowers as it helps them to build/improve their credit score and thereby, enhances their loan or credit card eligibility.

More choices for personal loan applicants

Loan applicants opting for a personal loan with longer repayment term have the option of choosing from a wide range of lenders as most banks and NBFCs offer loan tenures between 1 and 5 years on their personal loans. Very few lenders offer personal loans of tenures less than 1 year.

Drawbacks of Longer Repayment term for personal loans

High Interest Cost

Loan applicants availing a personal loan with longer repayment tenure have to incur a higher interest cost due to longer compounding of interest. Longer the tenure, higher would be the interest cost for the borrower.

Eligibility for additional loans

Personal loans with longer repayment tenure can block the EMI/NMI ratio of a borrower for a longer duration. For those with restricted monthly surpluses, availing a longer personal loan with longer tenure can adversely impact their eligibility for availing additional loans.