When taking a home loan, the applicant must understand the terms and conditions of the loan agreement in detail. The borrower has to know all the home loan details so that the loan agreement does not catch them by surprise. Knowing all the ins and outs of the loan terms like loan tenure, monthly EMI amount and other conditions can help you take a practical approach towards loan repayment and save money. When you take informed decisions regarding a home loan, you will be able to plan the financials accordingly.
The loan repayment structure depends a lot on the loan repayment tenure. There are long-tenure loans as well as short-tenure loans. Depending on your budget and the time you want to spend repaying the loan, you should choose the length of your loan tenure.
What is the tenure for a home loan?
Home loan tenure can range from a year to 30 years. The home loan tenure is the stretched-out time through which the person repays the home loan in the form of monthly EMIs. Sometimes, the loan tenure can be for more than 30 years, but the ideal home loan tenure for a borrower depends on several factors including monthly income, the interest rate charged and the age of the borrower.
For instance, if the person is young and far from his retirement age, then the person can get a long-tenure loan. Whereas, if the borrower is near retirement age, the loan repayment tenure will be shorter, and the person has to pay a higher monthly EMI amount.
Given below is a comparison between the longer tenure and the shorter tenure of a loan.
A home loan with longer tenure
Long-tenure home loans might range from 20 to 30 years. When the home loan tenure is very long, the EMI amount that needs to be paid each month is lower than that for a shorter duration. The person can repay the loan amount and the interest charged in a structured manner without affecting other expenses.
Longer home loan repayment periods are more cost-effective for the borrower. However, the long-tenure loan might have a higher interest rate charged that will eventually increase the cost of the loan.
Short-tenure home loan
A short-term home loan is a home loan with a repayment period of lower than 10 years. If you have the budget and the financial capacity to repay the home loan in a short period, then you should go for the short-tenure for home loan repayment. The monthly instalment for the short-term loan could be higher than the long-term loan but it will reduce the overall cost of the loan due to the lower interest rate.
However, it has the advantage of getting repaid and ending in a few years. In the long run, you save money with the short-tenure loan. Although the EMI is higher, the loan interest rate goes down with the shorter–tenure for home loan. The loan repayment tenure is the most important aspect to take into consideration when signing the loan agreement because the tenure and the EMI amount have an impact on your finances.
Knowing the different terms of loan repayment and the tenure difference can help you select the suitable loan repayment tenure. The tenure for home loan repayment can help you determine the loan EMI amount with the help of a home loan EMI calculator.
The factors affecting home loan tenure are as follows:
- Age of the borrower
The retirement age of the borrower is an important factor in the determination of loan repayment tenure. If you are young, you can opt for a long repayment tenure. This is because a borrower will have a stable active income source and is far from the retirement age. People who are nearing their old age should not go for long repayment tenure because they might not have an active source of regular income for repayment.
- Loan amount
The higher the loan amount, the longer the tenure is required to repay it. A larger loan amount will result in higher Equated Monthly Instalments (EMIs) payments, and a longer tenure will reduce the EMI payments to make them more manageable.
- Income
A higher income can help in availing a higher loan amount, which may result in longer tenure. However, borrowers with higher incomes can choose to repay the loan faster by opting for a shorter tenure.
- Credit score
A good credit score can help in availing a lower interest rate and a higher loan amount. This may result in a longer tenure, which can be beneficial for the borrower.
Conclusion
If you have a tight budget and cannot pay a high EMI amount, you should go for the longest repayment tenure possible. The EMI will not affect your budget, and you can easily continue other financial activities along with the loan repayment. However, if you do not wish to keep the burden of loan repayment on your shoulders for a long time, you should go for a short-tenure loan. The loan tenure should fit your convenience and budget while helping you buy a home.
