Long-Term vs Short-Term Personal Loan: Which is Better?

Basic financial knowledge can help you weigh options in financial markets and make informed choices. This becomes even more crucial when dealing with debt products like personal loans. You can easily complete a personal loan application process digitally, and some lenders may even allow you to avail of personal loans without documents if you meet the eligibility criteria.

Choosing the right loan tenure is one of the key aspects to consider when applying for a personal loan. This post will help you explore the intricacies of short-term and long-term loan periods for personal loans, providing insights into the factors that can help you select the most suitable loan tenure.

What is Loan Tenure?

Loan tenure is the period for which a loan agreement is set. It refers to the time frame within which the loan amount must be repaid to the lender. Personal loan tenures, typically expressed in months or years, are flexible enough to make repayment easy for borrowers. Lenders offer both long-term and short-term loan periods.

What is a Short-Term Loan?

A short-term personal loan has a repayment tenure ranging from a few months to two years. These loans are taken to meet sudden financial needs. Here are some pros and cons of short-term loans:

Pros:

• Lower Interest Costs: Due to the shorter tenure, the overall interest cost is lower.
• Quick Financial Solution: Helpful in meeting sudden, short-term financial needs.

Cons:

• Higher EMIs: The monthly EMIs can be higher due to the shorter repayment period.
• Temporary Assistance: Short-term loans don't meet long-term financial needs, providing only temporary financial assistance.

What is a Long-Term Loan?

A personal loan with a long tenure, extending up to 7 years, is called a long-term loan. These loans are taken to meet higher financial obligations. Here are the pros and cons of long-term loans:

Pros:

• Large Financial Requirements: Helpful in meeting substantial financial needs.
• Lower EMIs: The longer tenure ensures smaller EMI amounts.
• Debt Consolidation: Can be used to consolidate multiple debts into one loan.
• Credit Score Booster: Regular EMI payments over the long term can boost your credit score.

Cons:

• Long-Term Commitment: If you are struggling financially, a long-term loan can be a prolonged burden.
• Higher Interest Cost: The extended tenure results in a higher total interest cost.
• The loan tenure varies with different financial institutions, and lenders may define specific personal loan eligibility criteria and loan tenures. Therefore, it’s crucial to review the lender’s terms and conditions before deciding on the loan duration.

Significance of Choosing the Right Loan Tenure

Once the bank completes the personal loan verification process and approves your application, the lender defines a repayment schedule, including the loan amount, interest rate, and loan tenure. The loan tenure specifies the number of equated monthly installments (EMIs) that you must make to repay the loan in full.

Also read: What is an Equated Monthly Instalment (EMI)?

The loan tenure impacts the EMI amount and interest rates. It is crucial to select a suitable loan tenure that aligns with your financial capabilities. Both long-term and short-term loan periods in India have benefits and considerations, so it is essential to understand the implications before making a choice.

You can consider your monthly income, expenses, and overall financial stability when deciding on loan tenure.

Differences Between Short-Term and Long-Term Loans

Loan Amount

Long-term personal loans with extended repayment tenures of more than two years are well-suited for larger projects or purchases requiring significant money. High loan amounts can be repaid conveniently in small EMIs during longer tenures. On the other hand, a small amount of money can easily be repaid within a shorter time frame.

Interest Rates

While many people opt for a long-term personal loan to reduce their monthly financial burden, it can increase the overall borrowing cost. Lenders charge a higher interest rate on long-term loans to compensate for the increased risk of loan defaults. Shorter tenures typically come with lower interest rates, as the risk of default is reduced over a shorter period.

Debt-to-Income Ratio

Debt-to-income (DTI) measures the portion of your monthly income used to repay existing debts. A low DTI ratio indicates better repayment ability. Maintaining a low DTI ratio is necessary to manage your loan EMIs. Short-term loans can impact your DTI ratio more severely due to higher monthly EMIs compared to long-term loans. Consider your DTI ratio while applying for a new loan.

Age Limit

Your age affects your personal loan eligibility. Younger applicants are more likely to be offered long-tenure personal loans as they have more employment opportunities. Individuals in their 20s can get approval for long-tenure loans, while those in their 50s may find it challenging. The loan age limit requirements vary between lenders, typically ranging from 23 to 60 years for personal loans. Some lenders may also offer loans to senior citizens.

Monthly Cash Flow

Consider your monthly cash flow, financial goals, and capabilities when choosing the personal loan tenure. A shorter loan tenure results in higher EMIs, which may disrupt your financial management. Conversely, long-term loans lead to lower monthly payments. Missed EMIs or defaulting on loan payments can hurt your credit score. Therefore, it is vital to consider your repayment capabilities when choosing the loan duration. Using an online personal loan EMI calculator, you can find a suitable tenure with a convenient EMI amount.

Financial Freedom

With a shorter-term personal loan, you can gain financial freedom sooner, allowing you to use funds for other financial needs or investments. Borrowers with long-term loans limit their ability to pursue other goals due to the extended repayment period.

The answer to which personal loan tenure is better depends on individual circumstances and goals. Once you have selected a suitable tenure, you can make an online personal loan application. Lenders allow you to track your personal loan status. It may take a few hours to get approved and a couple of days to disburse the loan amount. Understanding the personal loan disbursal process will help you plan your finances.

Personal Loan Prepayment

Most lenders allow you to repay a loan before the loan tenure ends, a facility known as prepayment. You can make a part or full prepayment, helping you get rid of debt sooner and save on overall interest costs. However, it's important to understand the personal loan closure procedure, especially if you are considering closing your personal loan early.

In the initial years of the loan tenure, the interest component in the EMI is higher. This interest component gradually reduces, becoming the least in the later years of the tenure, thus reducing the savings on borrowing costs. However, lenders may levy a penalty for loan prepayment, which is a small percentage of the outstanding loan amount. Ensure that the prepayment penalty does not offset the savings from prepayment.

Simplified Personal Loan Application Process

Renowned lenders like Aditya Birla Finance Limited offer digital personal loan processing to help customers with timely funds. Each step, from application to document submission and verification to loan disbursement, can be completed online. If you meet the eligibility criteria and maintain a high credit score, you can get instant approval of your personal loan application and enjoy quick disbursal of the loan amount into your account.

Conclusion

Understanding loan tenure and its significance is vital for choosing a suitable personal loan tenure. You can decide on the right loan tenure by considering your financial position, needs, and anticipated cash flow. While short-term personal loans can be repaid quickly, within a few months to two years, long-term loans often come with higher amounts and smaller EMIs. Ensure you apply for a personal loan with a convenient tenure that allows for manageable EMIs and reduced total borrowing costs.