When you buy a home on loan, the lender, which is usually a bank, offers repayment options. The repayment mode is EMI or Equated monthly installments. These installments have the loan and interest component that is paid out every month to the bank till the time the loan with interest is not repaid. The tenure of the loan is the time period over which the loan will be repaid completely. Usually, the tenure varies from 5 to 30 years and the borrower is allowed some flexibility in choosing the tenure. This choice will determine important factors related to the repayment of the loan.
Let us look at various factors to be considered before choosing a tenure that is right for you.
1. Age
Your age will play an important role in determining the tenure of the loan. If you are availing the loan at the start of your career then you may choose a longer tenure. Whereas, if you are older, depending on your age, the tenure may be reduced. Usually, the tenure varies from 5 years to 30 years. So, a person in their 20s retiring at 60 can choose a tenure of 30 years. Whereas a person in their 40s must choose a shorter tenure so that loan is repaid while they are in employment.
2. Rate of Interest
The rate of interest is inversely proportional to the tenure. If the tenure is long the rate of interest will be proportionally lesser and vice versa. The interest rates are higher for short tenures to make up for the lesser time periods. You can evaluate your repayment capacity to determine the rate of interest. If you choose a shorter tenure the interest will be high, but the loan will be repaid in a shorter duration whereas for a long tenure, the rate of interest will be less but the repayment will take more time.
3. EMI
The tenure will determine the EMI payout that goes from your earnings every month. You need to calculate your expenses, financial obligations, and other expenditures before choosing tenure. After factoring in these expenses, you must choose a tenure that will let you make regular payouts comfortably. A longer tenure will reduce the monthly payouts whereas a shorter tenure will increase the sum.
4. Flexibility Options
Some banks and financial institutions may offer pre-payment or part lumpsum payments without significant penalties. These options can help in reducing interest on the principal amount and also reduce the tenure allowing you to be debt free early.
While deciding the tenure you must also consider long-term career goals and other financial obligations that are expected during the tenure of the loan. These circumstances can impact your financial capacity and hence these events need to be planned and prepared for in advance. You can use an interest calculator easily available online to know the exact amounts. This can help you in financial planning.
