Pro Tips To Manage Long-Term Personal Loans

There are many occasions in a persons’ life when their expenses surpass their source of income. For certain big-ticket expenses like buying a house or a car, one typically opts for a mortgage to meet the purchase cost. But for smaller expenses or in cases when one cannot come up with a security as a collateral for the mortgage, there are other means to finance the expense.

A personal loan comes in handy when one needs some extra money to contribute for a family wedding or to pay for school fees of children or for financing a family vacation or even a medical exigency.

Ideally, one should plan for such expenses, too, and create an emergency fund. But one may not have saved enough to have such a kitty. A personal loan becomes very useful in such situations.

These are unsecured loans, or loans where the borrower need not furnish any collateral as security, to assuage risk concerns for the lender. The lender, therefore, advances a loan based on its own risk assessment of the borrower. This is usually dictated by the credit history and thereby the credit score of the loan applicant. One can also rope in a co-applicant or a guarantor to provide additional assurance to the lender that the money shall be returned.

Personal Loan For Longer Term

Usually, personal loans are availed for meeting small cash requirements and for a short duration. Typically, this could stretch for a few months to a year, though many lenders offer longer-tenure personal loans, too.

The borrower has an option to go for a longer tenure of as many as five to seven years for the personal loan, even if the loan amount is not very large.

This has its own pros and cons. The biggest advantage of a longer-term personal loan is that the equated monthly installment, or EMI, of the loan shrinks. This means if a person avails a loan of Rs 1 lakh and opts for a three-year repayment period as against a six-month tenure, the EMI in the former would be much less than the second instance.

Whether one takes a long or a short-tenure personal loan would depend on the repaying ability of the borrower. If he or she has a relatively lower income and finds out that the EMI for a short-duration personal loan would put tremendous pressure and could lead to cash flow problem for meeting other daily expenses, then they should opt for a longer-tenure loan.

On the flip side, the longer-term personal loan translates into a much higher interest component due. The final decision on the loan tenure would need to be taken after factoring in various considerations unique to each borrower.

Tips To Manage Longer-Term Personal Loan

Tenure Plan:

The most important aspect for a long-term personal loan is that the borrower makes sure they opt for the right tenure that is not inordinately long. While a long-term personal loan helps reduce the EMI, the borrower could end up paying much more despite having resources to pay a higher amount. So, one needs to balance the need for lower EMI with smart planning to control the total interest outgo.

Repayment Mode:

A longer tenure runs the risk of losing track of the scheduled repayment deadlines every month. If one has opted to repay via cheques or physically every month, one can miss the date and end up defaulting on the loan. Especially for long-term personal loans, one should opt for automated deduction of the EMI from one’s bank account. That’s not all. One should make sure there is enough balance in the bank account before the scheduled EMI date as any default ends up lowering the credit score.

Pre-Payment:

While taking a long-tenure personal loan one may have done so keeping in mind one’s immediate repaying capacity every month given other expenses. However, if the borrower’s income goes up, so does the repaying capacity. Moreover, if one ends up with a lump sum amount from say a bonus payment at the workplace, one should opt for pre-payment of the loan, either partially or in its entirety. This is especially advised for personal loans as they carry a higher interest charge and prepayment can reduce the interest outgo significantly.

Conclusion

A personal loan is one of the easiest ways to meet short-term cash requirements that is beyond one’s income or savings. These loans come with the flexibility of having a short- or long-term tenure.

A short-duration loan restricts the total interest outgo but has a higher EMI while the long-term personal loan shrinks the immediate EMI but pushes up the total interest charges over the duration of the loan. One needs to balance the two factors with the monthly income and expenses to plan for a loan tenure. In particular, one should plan for a pre-payment for a long-term personal loan if one has the resources to do so.

IIFL Finance offers personal loans of as low as Rs 5,000 and as high as Rs 5 lakh without any collateral. These loans can be availed for as many as 42 months via a fully online and swift approval process.