Reduce Your Financial Burden With Longer-Term Personal Loans

There are often times today when we are faced with a financial crunch. Life seems to continually throw us challenges. The days of simple living almost seem a thing of the past. In the seventies and eighties, perhaps even the nineties, holidays meant travelling to an Aunt or Uncle’s place and simply spending time with cousins; or perhaps a huge get-together at a Grandparent’s place. Domestic Workers were easy to come by. Public transport was not overbearingly crowded as it is today. There were few who moved out from their hometowns in pursuit of work.

We’ve come a long way from those days today. Few of us are fortunate enough to get work in our hometowns. We have to move to an entirely new city, find a house and furnish it, and set up a new base entirely. Transfers are no more reserved only for the senior-most, extremely well-paid posts. Transfers are routine and with that come a host of expenses – down payments for rented apartments, furnishing your new home, admission fees of children, purchasing a car or a bike. In other cases, medical emergencies, home renovations, furnishing your home with self-help gadgets like washing machines and vacuum cleaners, wedding expenditure, or holidays at expensive tourist locations – all these put a huge financial burden on the average person. There are numerous times when we do not have the money readily available to use. Many of us therefore opt for a personal loan to help tide us through such times.

While all of us appreciate the fact that the personal loan product is now so readily available to those who need, all of us look for loans which allow us to pay the least amount of interest.

Two of the factors that affect the amount of interest paid are dependent on the borrower - your credit score on the one hand, and the loan tenure opted for, on the other. The higher your credit score, the lower the interest rate assigned. The amount of interest paid is also lower. In the case of loan tenure, the longer the tenure, the more is the interest you will be paying in the long run.

Suppose, for e.g., you take a loan of INR 500,000/- and are charged an interest rate of 24% p.a. by the lender. The table below calculates the interest you will pay if you opt for a tenure of 18 months and compares it to the interest you will pay if the tenure is then doubled to 36 months:

Loan Amount	INR 5,00,000/-
Interest	24% p.a.
Tenure	18 months	36 months
EMI in INR	33,351	19,616
Total Repaid in INR	6,00,319	7,06,191
Interest in INR	1,00,319	2,06,191

No one likes to part with more money than necessary. That is a natural reaction of an average person who has to work hard for their living. So the automatic tendency for most of us is to opt for a short tenure, pay the loan back as soon as possible and minimise the interest cost. From the above example, it is obvious that if we halve the tenure, we will reduce the interest component by more than half!

So, for most of us the most obvious choice is to take a loan with the minimum tenure possible and pay as little interest as possible. Some of us are tempted by the very short-term pay-day loans. The loan amount with the interest is debited from your account on salary day itself. When the loan repayment amount is small compared to your salary, this is not an issue. But what if it eats up a huge component of your salary? How will you fund the remaining monthly expenditure – school fees, groceries, electric, gas and telephone bills, transport, medicines, travel …?? At this point of time, you may either apply for another pay-day loan, or seek an extension along with the expensive default penalties. You may have to keep rolling over the loan for a few months and will end up paying far more interest on the loan than you would have on other long-term loans.

But even if some of us do choose long-term personal loans, we still try to keep the tenure as short as possible. In the above example, it is easy to be tempted to opt for an 18-month tenure. If you have planned your loan well, have worked out the budget and are confident that you can repay the EMI without it affecting the remaining financial responsibilities, then it would make good financial sense. But there are several situations where it would be far more practical to opt for a long-term personal loan with a longer tenure. Here are some examples of when this may be a good idea:

When You Need A Higher Loan Amount:

Suppose you need a loan of INR 10 Lakhs. After doing the calculations, taking into account your existing net salary and your regular monthly financial commitments, you find that you could put aside approximately INR 40,000/- per month for the EMI. If you accept a loan term of 3 years at an interest rate of 21% p.a., your EMI will work out to be INR 37,675/- per month. However, if you want to reduce the tenure to two years, your EMI changes to INR 51,386/- per month. This may be difficult for you to manage, and you may end up defaulting on your loan amount on a regular basis. Apart from the penalties and a lowering of your credit score, this will also add to your stress and anxiety.

When Faced With Uncertainty:

There are several times when we are unsure of the total loan amount we need or how much we can set aside for the EMI every month. This may happen when there is a sudden medical emergency. In such a case it may make more sense to opt for a higher tenure offering higher loan amounts. If you opt for a lower loan amount, you may find that it is not sufficient to cover the expenses. This may make you default on the EMI or seek another loan. Here, it is important to keep in mind that defaulting on debt repayments affect your credit score adversely and your ability to leverage credit in the future. Similarly, each loan enquiry affects your credit score adversely.

Many of us also receive a substantial part of our income through bonuses and incentives. It is not always easy to predict what this amount will be ahead of time. Thus while planning the personal loan EMI, keep the incentive projections to the minimum even if this means opting for a longer tenure. Accumulate the incentives received and part-pay or prepay the loan as and when possible.

If You Are Self-Employed or In Business:

Similarly, if we are self-employed or running a business where income levels vary from month to month, it is usually prudent to opt for a long-term loan with a lower EMI monthly burden, keeping enough room for a drop in the cash flow. In case cash flows improve, you could keep it aside and prepay the loan or opt for a part-payment. This is a better option to default which affects your credit score.

When Your EMI Repaying Capacity Is Limited:

Opting for a long-term personal loan makes most sense when our regular expenses are high compared to our regular income, leaving us with very little spare cash. This is often the case when we begin our careers, or are starting a family, or are taking over the responsibility of caring for our elderly parents. At such a time if you run into an emergency situation and need to raise a loan, keep in mind the spare income you can set aside each month for the EMI. You can use a personal loan EMI calculator available on the IIFL Finance website to help you plan your personal loan and tenure, before approaching a lender for a loan.

To conclude, taking a loan for a short-term means paying lesser interest on the loan. But while this does seem like a brilliant idea up front, it may not be the most practical solution or the best option in all cases. Defaulting on loans and delayed payments undermine your credibility, your credit score and your ability to leverage future credit for unforeseen emergencies. While planning your loan tenure and EMIs, it is best to keep a buffer of 10 to 20% of your monthly salary for other exigencies. If you do have a requirement of a personal loan, do visit the IIFL website. We offer instant online personal loans with minimal documentation and no pre-conditions attached to its usage.