The tenure of a loan is directly proportional to the loan amount an individual can avail, EMI, total interest outgo and the ability to plan other important goals. Hence, an impulsive decision can prove detrimental in the long run.
A house is made up of walls and beams, but a home is made up of love and dreams – it is this philosophy that Saurav Shukla (name changed on request) lived with all his life. But today, when he wants to set out to fulfil it, a major roadblock awaits him.
“There is a huge gap between reality and our aspirations; hence, we need to reach out to banks and NBFCs. However, the bigger question for me is – how long should the loan tenure be, given that I have only fifteen years of service left?” This query posed by Shukla is not a case in isolation; in fact, many borrowers have often raised similar questions while availing a home loan, hence addressing this issue becomes crucial.
Determinants a borrower must bear in mind:
Make a well-informed decision: One must begin the process by determining the eligibility and the capacity to repay the home loan. The eligibility criteria usually covers income, age, qualification as well as continuity of occupation, type of employment i.e. salaried/self-employed/ retired and number of dependents.
Check your credit score: For a home loan eligibility appraisal, the credit score plays a crucial role. For example, CIBIL score ranges from 300 to 900. Anything above 750 is considered a good credit score.
Conduct a thorough research:
It is important to talk to several lenders to figure out the best home loan one may qualify for. Most borrowers make the mistake of only comparing the interest rates, whereas the tenure of the loan is an equally important factor. For example, many people are unaware that a floating rate is suitable for a long-term loan. Hence, accurate research is the key.
— Hemant Rustagi, CEO,
Wise Invest Advisors
Will the status be then? Let’s check out the table below:
So, you can save around Rs 11, 82,793 of interest by choosing a shorter tenure of 20 years at an expense of a slightly higher EMI of Rs 2,177.
The loan: Income ratio?
There should be a good balance between debt and income, advises Pankaaj Malade, financial planner.
“The proposed EMI must ideally not exceed 30-40 percent of your net monthly income, especially if you have only one dedicated source of income. And if you have varied sources of income, your EMI must not exceed 50-60 percent of your net monthly income,” he adds.
How should you calculate your loan tenure?
A home loan is a long-term commitment and requires a borrower to do a lot of homework before applying for the same. Elaborating on the same, Rishi Mehra, CEO, Wishfin says, “Many people opt for a longer loan tenure for the sake of lower EMIs. However, a longer tenure comes with a pitfall of massive interest repayment that will go through the EMIs.” He adds, “Let’s assume you earn Rs 60,000 net per month and are seeking a 25-year home loan of Rs 35 lakh at an interest rate of 8.60 percent per annum.