Personal loan minimum and maximum tenure: How to choose the ideal tenure? | Mint

When you take a personal loan, choosing the right tenure is important. If you choose a higher tenure than required, you will end up paying more interest. If you choose a lower tenure than required, the higher EMI may disturb your monthly budget and strain your cash flows. In this article, we will discuss what is the minimum and maximum tenure for personal loans, and how to choose the ideal tenure.

What is a personal loan tenure?

Whenever you take a personal loan, you have to repay it within a specified period. During this period, you make fixed monthly payments to the financial institution in the form of Equated Monthly Instalments (EMIs). The period within which you commit to pay back the loan amount to the financial institution is known as the personal loan tenure.

What is the minimum and maximum tenure for personal loans?

Banks and NBFCs offer various tenure options to choose from within which you can repay the personal loan. The shortest tenure is the minimum tenure. Usually, for most banks and NBFCs, the minimum personal loan tenure is in the 3-12 months range. However, individual financial institutions may choose to keep the personal loan minimum tenure lower or higher than the 3-12 months range.

The highest time period offered by the financial institution for the personal loan repayment is known as maximum tenure. Usually, most banks and NBFCs offer a maximum tenure in the 5-7 years range for the repayment of a personal loan. However, individual financial institutions may choose to keep the personal loan maximum tenure lower or higher than the 5-7 years range.

Why is choosing the personal loan optimum tenure important?

The personal loan tenure must be chosen carefully. If you choose a higher tenure than required, the personal loan repayment will continue for a longer period than required. The longer the loan continues, the higher the interest amount you will end up paying. Also, the feeling of owing money to others makes some people uncomfortable.

During the personal loan tenure, you can opt for foreclosure if you have accumulated more money over and above the EMIs to repay the outstanding. However, the financial institution may charge a foreclosure fee. The foreclosure fee can be up to 3% of the outstanding principal, although it varies among financial institutions. Hence, it is important to choose the personal loan optimum tenure. It will ensure you don’t pay a higher interest amount.

On the other hand, if an individual chooses a shorter tenure than required, the EMI will be higher. At times, they may find it difficult to pay the EMI(s) if some unexpected expenditure arises. A higher EMI can strain the monthly budget and put pressure on cash flows. In a particular month(s), if there aren’t adequate funds available to pay the EMI, the individual may have to dip into their emergency fund. If there is no emergency fund available, funds allocated for other purposes may have to be redirected towards paying the personal loan EMI.

To avoid such a situation(s), as mentioned above, it is important to choose an optimum tenure for the personal loan.

Factors to consider when choosing the optimum personal loan tenure

You should consider a number of factors when choosing the optimum personal loan tenure. Some of these factors include the following.

Monthly income

Your monthly income is one of the most important factors when choosing the personal loan tenure. Evaluate how your current monthly income is allocated towards needs, wants, savings and investments. After meeting all of the above, check how much monthly free cash flow is left for allocating towards the personal loan EMI. Accordingly, you may choose an EMI that is slightly lower than the available monthly free cashflow. Choosing a slightly lower EMI will give you a buffer to accommodate any unexpected expenses that may arise.

Debt-to-income (DTI) ratio

While evaluating your personal loan application, the bank will consider your DTI ratio. It measures the percentage of the monthly income going towards debt repayments. Banks are comfortable with a DTI ratio of 35% or lower. If your DTI is lower than 35%, it gives you room to choose a shorter loan tenure with a higher EMI and complete the loan repayment faster.

Personal loan interest rate

The interest rate at which the personal loan is being offered, along with the loan amount and tenure, will determine the EMI amount. If the interest rate at which the personal loan is being offered is high, you will have to choose a longer tenure if you wish to keep the EMI lower. Similarly, if the interest rate is lower, the EMI will be lower. In such a case, you have scope to opt for a short tenure.

Loan amount

In the earlier section, we saw how the interest rate plays an important role in determining the EMI amount and, accordingly, the tenure to be chosen. Similarly, the personal loan amount also plays an important role in determining the EMI amount. The higher the personal loan amount, the higher the EMI, other factors being constant.

If your personal loan amount is smaller, your EMI will be smaller. Accordingly, you can opt for a shorter tenure. However, if the personal loan amount is bigger, your EMI will be bigger. Accordingly, you can opt for a longer tenure so that the EMIs can be easy on the pocket.

Prepayment fees

You should check whether the personal loan foreclosure option is available and what are the fees for it. If the fees are on the higher side, it is important to choose the optimum tenure. If you choose a longer tenure than required, and later have to foreclose the loan, a higher foreclosure fee can burn a big hole in your pocket.

Your age

If you are young, you can afford to choose a longer loan tenure with lower EMIs that are easy on the pocket. However, if you are nearing retirement, the bank will allow you a maximum tenure that coincides with your retirement age. For example, if you are 56 years old, the bank will allow a maximum tenure of four years, equal to your retirement age of 60 years. In such a scenario, even if you want to choose a higher tenure (for example, five years), the bank will mostly not allow it, as it will exceed your retirement age of 60 years.

What is the optimum tenure?

We have discussed the various factors that must be considered when deciding the personal loan tenure. The optimum tenure is one that results in lower interest outgo, and at the same time, doesn’t put pressure on your cash flows. The optimum tenure will vary among individuals as the circumstances for everyone are different. You should evaluate your situation based on the factors discussed and arrive at an optimum tenure that caters the most to your requirements.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.