The main advantage of increasing the loan tenure is that the monthly EMI becomes smaller. With a smaller EMI, customers can easily manage their household expenses without feeling too much financial strain.
Disadvantages of Long Loan Tenure
A longer loan tenure means that the responsibility of repaying the loan extends over many years, keeping the burden of EMI payments for a long time.
Additionally, over this period, a significant amount of interest is paid to the bank, making the loan much more expensive.
Example: Benefits of Short Tenure
Let’s look at a practical example. If you take a home loan of Rs 30 lakh for 15 years at an interest rate of 9.55%, your monthly EMI will be Rs 31,417.
Over the course of the loan, you will pay Rs 26,55,117 as interest, making the total amount to be paid Rs 56,55,117, including both the principal and interest.
How Long Tenure Can Lead to Losses
On the other hand, if you take the same Rs 30 lakh loan for 30 years, the EMI drops to Rs 25,335. However, at the same interest rate of 9.55%, you will end up paying Rs 61,20,651 in interest alone over 30 years.
Including the principal, the total repayment will be Rs 91,20,651, which is more than three times the original loan amount.
This shows that while a longer loan tenure results in a smaller EMI, it significantly increases the total amount paid due to the higher interest.
What to Do If Your Loan Tenure Is Too Long?
If you find yourself with a loan that has a long tenure, there are a couple of ways to reduce the overall cost:
Increase Your EMI: If your financial situation allows, consider increasing your EMI. By doing this, you can pay off the loan faster and reduce the total interest paid to the bank.
Prepayment Option: Another option is prepayment. If you cannot afford a higher EMI, you can make lump sum payments towards your loan.
This will reduce the principal amount, and once the balance is low enough, you can restructure the loan to increase the EMI. This approach helps pay off the loan quickly and saves on interest payments.
In both cases, the goal is to reduce the amount of interest paid by shortening the loan duration and paying off the loan more quickly.
