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Why Your Loan Tenure Should Be Short (And Sweet)

People often like to borrow loans for longer periods. This is particularly true for the home loans, which run for around 15 to 20 years.

The reason is pretty simple and straighforward: Longer the loan tenure, lower is the EMI.

And, lower the EMI, lesser is the strain on your monthly budget. (In fact, in many cases extending the loan repayment period becomes a necessity, so as to become eligible for the loan.)

Suppose you require a home loan of Rs.50 lakhs and the prevailing rate of interest is 9%.

Then, for a typical 15-year loan period, the EMI payable per month works out to approx. Rs.50,700.

This monthly outflow can be reduced by as much as Rs.8,700 — a 17% reduction — to only Rs.42,000... by extending the loan period to 25 years.

By the way,
- For a 10-year loan repayment period, the EMI would work out to Rs.63,300.
- And, for a 20-year loan repayment period, the EMI would be Rs.45,000.

Since lower payout makes the loan more affordable and pinches the pocket that much less, people prefer longer loan tenures vis-a-vis the shorter ones.

Now suppose, your monthly income is Rs.80,000.

Then, the lender may not even extend you the loan... unless you opt for a 25-year tenure. The reason is pretty obvious. At Rs.63,000 EMI (10-yr loan), almost 80% of your salary will go to pay the EMI, leaving you with just Rs.17,000 to manage your day-to-day living for the entire month. This is definitely not a desirable option.

Even Rs.50,700 (15-yr loan) or Rs.45,000 (20-yr loan) as EMI, would mean that 63% or 56% respectively is paid out towards home loan repayment. This too is on the higher side.

Only at Rs.42,000 EMI (25-yr loan) i.e. 52%, is the payout more or less close to the comfortable range of 50% or less. You are left with a respectable Rs.38,000 for your monthly expenses.

Squeeze your loan repayment period as much as you can!!

However, simple calculations will reveal that longer loan tenures isn't really a good idea. Hence, unless it's absolutely unavoidable, you should have as short the loan tenures as feasible.

Taking the same example as above...
... for a 25-year loan, your total interest burden would amount to Rs.76 lakhs (which is even more than the principal amount that you borrowed).

You can save Rs.50 lakhs — yes Rs.50 lakhs — in interest payout if you can afford to repay the loan in 10 years. Total interest payout for a 10-year loan period is a mere Rs.26 lakhs. That's a BIG BIG savings that you simply cannot ignore.

Even for a 20-year loan, the total interest payout would be Rs.58 lakhs. This saves you Rs.18 lakhs in interest, as compared to a 25-year loan.

And, for a 15-year loan, the total interest payout would be Rs.41 lakhs — a savings of Rs.35 lakhs.

Given these huge savings, you should avoid longer tenure on your loans.

If higher EMI is a problem, don't simply extend the loan tenure. That's the easy, but VERY expensive option.

Instead, a better alternative would be to increase the down-payment and reduce the loan amount. This would bring down the EMI burden, along with the savings in total interest payout. A win-win situation.

If that also doesn't work, you must reduce the overall budget for your home. It is not advisable to put your family and yourself under financial stress for such a long period of 15-25 years. Don't let your beautiful dream home turn into an ugly nightmare.

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