EMIs – TENURE RELATION

Tenure – Period for which a loan in undertaken.

EMI – Equal Monthly Installment is amount repayable on a monthly basis (to clear the loan).

After understanding ‘tenure’ and ‘EMI’ let us understand their relation. In housing loans tenure is generally vary between 5-20 years. Borrowers prefer long tenures and reason being obvious – amount is quite large. Longer tenure means lower EMIs and shorter tenure means higher EMIs. Interest amount paid on shorter tenure is less compared to longer tenured loans wherein the interest amount increases over the duration of the loan. There are various factors that affect the determination of the tenure of the loan.

Although it should be borne in mind that these factors are not mutually exclusive and so all the elements should be considered before judging the tenure of the loan.

Borrower’s income: Part of borrower’s disposable income is used for repayment of loan. So if the net disposable income is low, it is advisable to go for a longer tenure. The loan amount is spread over a long period of time reducing the immediate burden; this means that borrower will need to pay interest for the long duration of the loan. Thus this is the foremost factor.

Amount of loan : The factor helps to judge the tenure of the loan. If the amount is huge it is preferable to go for longer tenure and vice-versa. Short tenure loans are charged with low interest rates in comparison to long tenure loans as banks are able to estimate short term interest rates graph with more accuracy than for long term.

If one has sufficient liquidity and can repay their loan at the earliest should go for a short tenure and take full advantage of lower rates of interest.

Borrower’s objective : Borrower’s intention for taking the loan has to be clear. Do you want to take the loan to purchase property for personal use or as an investment ?

If it is as an investment, shorter duration loan is better if in future you would want to repay the loan amount before the tenure completes (for no extra charges on early termination) to maintain capital liquidity.

Expected income : Future income of the borrower can play a vital role in deciding the loan tenure. Increase or decrease of your income over the tenure of the loan (depending on the initial years of the career or towards retirement) will aid in deciding the duration of the loan. For instance, if you were to retire in 5 years time then loan tenure would be a maximum of 5 years. But if a 30-32 year old were to take a home loan he/she could go for 10-20 years tenure as his/her income would be increasing with increase in his/her work experience. So opting for a long term loan will ease the ease the burden and spread it over the years.

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EMIs – TENURE RELATION

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