When applying for a personal loan, one of the key decisions you may face is choosing the repayment tenure. Choosing a shorter or longer tenure determines not just how much your EMI would be, but also how much total interest you end up paying over the repayment tenure. Let’s take an example to understand how tenure directly affects your EMI and total interest cost.
Suppose you availed a personal loan for Rs 2 lakh at an interest rate of 10.50% p.a. Stated below are the EMIs, total interest cost and total amount payable for loan tenures of 1 to 5 years:-
| Tenure | Interest Rates (p.a.) | Loan Amount | EMI | Total Interest | Total Payable |
| 1 year | 10.50% | Rs 2 lakh | Rs 17,630 | Rs 11,557 | Rs 2,11,557 |
| 2 years | 10.50% | Rs 2 lakh | Rs 9,275 | Rs 22,605 | Rs 2,22,605 |
| 3 years | 10.50% | Rs 2 lakh | Rs 6,500 | Rs 34,018 | Rs 2,34,018 |
| 4 years | 10.50% | Rs 2 lakh | Rs 5,121 | Rs 45,792 | Rs 2,45,792 |
| 5 years | 10.50% | Rs 2 lakh | Rs 4,299 | Rs 57,927 | Rs 2,57,927 |
If you opt for a longer personal loan tenure
A longer personal loan tenure reduces your EMIs, making repayment manageable and reducing the risk of loan defaults. You can also better handle monthly expenses, unexpected financial emergencies and maintain a surplus to invest in important financial goals.
However, this EMI flexibility comes at a cost. While longer tenures lower your EMI from Rs 17,630 (for a 1-year loan tenure) to Rs 4,299 (for a 5-year loan tenure), they significantly increase the total interest payable. This is due to the interest compounding for a longer duration. For a 5-year loan tenure, you end up paying Rs 57,927 lakh as interest which is more than 5 times the interest paid on a 1-year loan tenure (Rs 11,557).
If you opt for a shorter personal loan tenure
Shorter personal loan tenure reduces your overall interest cost but increases your EMI. If you have limited repayment capacity, a shorter tenure can put a strain on your monthly budget and increase the chances of missing an EMI. Therefore, it’s important to carefully consider the trade-offs between total interest cost and manageable EMIs while finalizing your loan tenure.
How You Can Choose the Optimum Tenure to Minimize Your Total Interest Cost
If you have adequate repayment capacity, you can opt for shorter personal loan tenures to save on overall interest cost and close your personal loan early. But if you have limited repayment capacity, you can opt for longer tenures and consider prepaying when you have enough surplus funds.
You have two options in case of personal loan prepayment: –
- Reduce your EMIs for the same tenure, or
- Reduce the tenure for the same EMIs
You can consider reducing your personal loan tenure as it would lead to lower interest costs. But if your current EMI is not manageable and causing strain in your monthly budget, you can opt for EMI reduction. But do note that you shouldn’t opt for prepayments at the cost of essential financial goals, dipping emergency fund and monthly contributions. Further, most banks and NBFCs levy prepayment charges on personal loans availed at fixed interest rates.
