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Dec 11, 2017 11:49 AM IST | Source: Moneycontrol.com

Are you taking a personal loan? Here’s how loan tenure impacts your repayment burden

You should take recourse to personal loan only if there is an utmost urgency to meet some financial need.

Navneet Dubey @navneetdubey91

Are you getting too many calls offering pre-approved personal loan on the basis of your credit score or take-home salary? Availing loan facility through the personal loan window has become easier these days, especially if the amount sought is low, say about Rs 2-5 lakh. All you need is a little documentation and you can get your loan amount directly in your bank account in no time.

Opting for a loan is not a bad thing. It helps in balancing your finances in times of need. However, depending on a personal loan - which comes at a higher rate than most other loans such as a home loan or car loan - may not be good at all times. It may add stress your personal finances because of the high monthly repayment outgo through EMIs.

Therefore, you should take recourse to personal loan only if there is an utmost urgency. Also, you should make sure that how much loan amount do you exactly need and what should be the tenure of re-payments? Taking a personal loan requires a careful decision-making otherwise you can fall into a serious debt trap.

Also, you should try and keep the repayment period short to reduce your interest burden although your EMIs would be higher than a longer-tenure loan. Let us understand the interest repayment issue through an example:

If you avail a personal loan of Rs 2 lakh at an interest rate of 14% today then it will cost you in the following manner as per tenure.
TenorEMITotal Interest DueTotal Amount Payable
1 YearRs.17,957Rs.15,489Rs.2,15,489
2 YearsRs.9,603Rs.30,462Rs.2,30,462
3 YearsRs.6,836Rs.46,079Rs.2,46,079

Source: BankBazar.com

Case1: If you have taken a loan only for 1 year then the total interest which you need to pay at the end of the 1st year will be Rs 15,489 which will be over above the principal amount of Rs 2 Lakh.

Case2: If you have taken a loan for 2 years then the total interest which you need to pay by the end of the 2nd year will be Rs 30,462 which will be over above the principal amount of Rs 2 Lakh.  This shows that even if the monthly EMI get reduced to Rs 9,603 but still, you have to pay a higher interest due to increased tenure.

Case3: Similarly, if you have taken a loan for 3 years then the total interest which you need to pay by the end of the 3rd year will be Rs 46,079 which will be over above the principal amount of Rs 2 Lakh.

This again shows that when your tenure increases, though the monthly EMI you need to repay your loan is lesser, the interest will increase.
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