Personal Loan: 5 key determinants of repayment tenure you need to know | Mint

If you are planning to raise a personal loan then one of your key concerns could be to determine how easily and comfortably you can repay the same. Notably, borrowers can determine the loan repayment tenure on the basis of numerous factors.

At the outset, it is worth mentioning that the personal loan repayment period and amount of EMI are inversely proportional to each other. This means longer the duration, smaller the EMI. On the contrary, shorter the duration, bigger the EMI. In other words, if you want to repay the loan quickly, you will have to shell out higher EMIs.

These include the following:

1. Interest rate: When interest rate is high, the amount of EMI will naturally be higher. So, you can stagger your loan repayment over a longer period. When the rate of interest is lower, the EMI will be smaller at the same time.

So, you may decide to repay the amount in a short span of time subject to your income — of course.

2. Ability to repay through fixed income: How long you take to repay the loan hinges on your fixed income every month. Higher the income, the shorter your loan repayment period. And lower the monthly fixed income, the smaller should your EMI be.

It’s vital to remember that one should keep total EMI below 50 percent of net monthly income. This way, loan repayment remains sustainable. For instance, if your net monthly income is ₹1.5 lakh, your EMI should not exceed ₹75,000. 

3. Expectation of future receipts: If you have borrowed money as a personal loan with a hope of receiving some income from another source in near future then it is recommended to repay the loan as soon as you can, thus keeping the loan repayment tenure as short as possible.

But if there is no expectation of higher income in the near future then it does not harm to keep the loan repayment period long. A higher fixed income in future could be a rental income or salary appraisal or annual bonus.

4. Assured cash windfall: Apart from some future income, if you are expecting some assured cash windfall such as maturity of an investment then also you can repay the loan prematurely or keep the tenure shorter.

5. Bearing on financial goals: The tenure should also be kept short or long in order to make sure that it makes minimal impact on your long term financial goals. 

This means if your loan repayment is leaving little money to save and invest in order to create adequate corpus for your long term financial goals then it’s time to rethink over the tenure.

The chief purpose of the investing journey is to be able to attain financial goals.

(Note: Remember that taking a loan carries its own risks)