A personal loan is one of the most common financial decisions in today’s fast-paced world. Personal loans provide quick funds without collateral, Whether for a wedding, medical emergency, home renovation, or even a vacation. However, one critical decision that most borrowers face is whether to opt for a lower EMI or a shorter loan tenure.
While this might seem like a simple choice, the impact of this decision affects your monthly budget, long-term savings, and even your credit profile. This article dives deep into personal loans, explains how loan tenure and EMI work, and helps you decide what makes better financial sense for your situation.
Understanding the Basics: EMI vs. Tenure
Before we evaluate which option is better, it’s essential to understand how personal loans work. When you take a personal loan, you agree to repay it through Equated Monthly Instalments (EMIs) over a fixed tenure at a given interest rate.
- EMI (Equated Monthly Instalment): The fixed monthly amount you pay to repay the loan.
- Tenure: The duration for which you repay the loan is usually from 12 months to 60 months.
- Interest: The lender charges the cost of borrowing the loan.
There is a direct relationship between EMI and Tenure:
- Shorter Tenure = Higher EMI + Lower Interest Outgo
- Longer Tenure = Lower EMI + Higher Interest Outgo
Scenario 1: Choosing Lower EMI – What You Gain and Lose
Many people prefer to go for lower EMI because it reduces their monthly cash flow burden. A lower monthly outgo is the safest bet if you’re already managing multiple expenses like rent, children’s education, and other EMIs.
Benefits of Lower EMI:
- Better Monthly Affordability: You won’t strain your current budget.
- Lesser Risk of Default: Lower EMI increases the chance of timely repayment.
- More Room for Other Investments: You can invest the leftover money in SIPs, emergency funds, or recurring deposits.
Drawbacks of Lower EMI:
- Higher Interest Cost: A longer tenure results in more interest paid over time.
- Longer Financial Obligation: You stay in debt for a longer duration.
- Reduced Future Loan Eligibility: Since the loan remains open longer, it may affect your credit eligibility for future loans.
Let’s consider an example:
- Loan Amount: Rs. 5,00,000
- Interest Rate: 12%
- Tenure: 5 Years (60 months)
- EMI: Rs. 11,122
- Total Interest Paid: Rs. 1,67,320
- Total Amount Repaid: Rs. 6,67,320
While your EMI is manageable, you pay a significant amount as interest.
Scenario 2: Choosing Shorter Tenure – What You Save and Risk
On the other hand, choosing a shorter tenure means your EMIs will be higher, but you’ll pay less interest overall and get debt-free faster.
Benefits of Shorter Tenure:
- Lower Interest Outgo: You save a lot on total interest payments.
- Faster Debt-Free Life: You close your liability sooner, giving you peace of mind.
- Better Credit Profile: Lenders see you as a responsible borrower who repays quickly.
Drawbacks of Shorter Tenure:
- High EMI Pressure: The monthly outgo may be too heavy, especially for middle-income earners.
- Risk of Missing EMI: High EMIs can cause missed payments if not appropriately planned.
- Less Monthly Flexibility: You might not have extra funds for emergencies or investments.
Now, taking the same loan example:
- Loan Amount: Rs. 5,00,000
- Interest Rate: 12%
- Tenure: 2 Years (24 months)
- EMI: Rs. 23,537
- Total Interest Paid: Rs. 64,888
- Total Amount Repaid: Rs. 5,64,888
You pay more EMI per month but save more than Rs. 1 lakh in interest compared to the 5-year plan.
So, What’s the Better Option? EMI or Tenure?
There is no universal answer to this question. It depends on several personal and financial factors. But here’s how you can decide:
1. Assess Your Monthly Income and Expenses
If you have a stable income and fewer obligations, go for a shorter tenure. If your budget is already tight, you might have no choice but to choose a longer tenure with lower EMI.
2. Evaluate the Total Interest Outgo
Do not just focus on the EMI amount. Always check the total amount payable, which includes the interest. Use online EMI calculators to compare scenarios.
3. Consider Your Financial Goals
Do you want to save more for a house, children’s future, or emergency fund? If so, a lower EMI might help. But if getting debt-free is your top priority, a shorter tenure is better.
4. Think About Loan Prepayment Options
Some lenders allow part-payment or foreclosure without penalty. If you’re expecting a bonus or cash inflow in the future, go for a longer tenure now but prepay later to reduce interest costs.
Smart Loan Planning Tips: Combine Both Worlds
You don’t always need to choose between a lower EMI and a shorter Tenure. A wise borrower can strike a balance using the following tips:
Tip 1: Start with a Lower EMI but Prepay Aggressively
Opt for a longer tenure but make occasional part-payments or increase EMI whenever possible. This step reduces the interest burden without stressing your monthly budget.
Tip 2: Choose Step-Up or Flexible EMI Options
Some banks offer step-up EMIs, where you start with a lower EMI, increasing with time and matching your expected income growth. It’s a good middle ground.
Tip 3: Refinance or Balance Transfer
If interest rates drop significantly, you can shift your loan to another lender at a lower rate and either reduce EMI or reduce Tenure, depending on your financial goals.
Impact on Credit Score and Loan Eligibility
The choice between EMI and Tenure also affects your CIBIL score and future credit eligibility.
- A lower EMI with longer Tenure may indicate dependency on easy credit, which is not negative but could reduce your loan eligibility.
- A higher EMI with a shorter Tenure shows financial strength and discipline, improving your creditworthiness.
Additionally, timely repayments—regardless of EMI size—are the most significant factor influencing your credit score. So, whichever option you choose, make sure you don’t default.
Psychological and Emotional Impact
Sometimes, the choice is also psychological. Long-term debt can weigh on your mind, affect your mental peace, and delay your long-term goals, like starting a business or retiring early. On the other hand, high EMIs may stress you every month, especially during emergencies or job uncertainties.
Therefore, your decision should align with your financial status and emotional comfort.
Final Verdict: What Should You Choose?
If you can afford it without compromising essential needs, always prefer a shorter Tenure because:
- You save more money
- You close the debt faster
- You improve your credit profile
However, if cash flow is a concern, starting with a lower EMI is better, but actively plan for prepayment as your income grows.
Conclusion
Regarding personal loans, the biggest mistake you can make is focusing only on the EMI amount. While low EMI looks attractive at first glance, it could cost you significantly more in the long run. Similarly, jumping into a short tenure with a high EMI could damage your financial balance if not well-planned.
The wise choice lies in understanding your finances, goals, and repayment capacity. Whether you choose a shorter tenure or a lower EMI, ensure you control your debt—not the other way around.
So, next time you’re applying for a personal loan, ask yourself how much you can borrow—but how smartly you can repay it.
