Ideal Tenure Makes Repayment Easy

Ashish Gupta lists out some factors you need to analyse to arrive at the ideal loan tenure

A loan tenure is the duration of a loan. In case of housing loans , generally, the tenure is long. It may vary anywhere between five and 20 years. Most borrowers prefer to borrow for a longer period of time. The reason is quite obvious. The amount borrowed is quite large. Also, the amount of monthly repayment through equated monthly instalments (EMIs) depends on the tenure of the loan. The longer the tenure, the lower will be the EMI. And shorter the tenure, the higher will be the EMI. On shorter loan tenures, the interest amount paid will be lesser as against the longer tenure loans, where the interest amount increases over time.

There are various factors that influence the determination of a loan tenure:

Income of borrower

The first and foremost is the income of the borrower. The disposable income of the borrower makes a difference. The reason is that it is from this part of the income that a borrower repays the loan instalments. So, if the net disposable income is low, it is advisable to go in for a longer tenure loan rather than opting for short tenure one. This way the EMI portion is reduced. The loan amount is spread over a longer period of time. The immediate burden on the borrower is lower. This is despite the fact that the borrower is required to pay interest through the extended period of borrowing.

Loan amount

The other factor influencing the loan tenure is the amount of loan . The amount borrowed determines whether one should opt for a longer tenure or shorter tenure. In case the amount borrowed is huge, a borrower may prefer to go in for a longer tenure loan.

Generally, short tenure loans attract lower rates of interest as compared to long tenure loans. This is because banks can estimate the nearterm interest rate movements more accurately as compared to movements in the long term. So, in case one has adequate liquidity and resources to repay the loan amount faster, he may opt for a shorter duration loan and thus take advantage of the lower interest rate.

Objective of borrower

Another factor that influences the loan tenure is the objective of the borrower. Whether a borrower is intending to take the loan to purchase a property for his own use or as an investment has a bearing. Generally, if a borrower is borrowing for the purpose of investing, he may just go for a shorter duration loan so as to avoid the exit charges payable in case of early termination of the loan, and to maintain liquidity of his capital.

Expected income

Another important element to be considered is the future income of the borrower. In case the borrower is expecting an increase or reduction in his income, he has to decide on the tenure accordingly. For example, in case a person is to retire in another five years, he may look at a maximum of five years tenure, and may not like to stretch it beyond his retirement age.

On the other hand, a 30-year-old can think of a longer tenure loan, stretching up to 10-20 years, because gradually his income would also be increasing. In the initial years of employment, the income is low. It gradually increases over the years. So, one may opt for a longer duration loan and reduce the present burden. None of these factors can be individually taken to decide on the loan tenure. All these factors are interlinked and need to be analysed in totality so as to arrive at an ideal loan tenure.

Courtesy:- Times Property dt:- 26/12/2009

by: Raja Kaushar

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