Updated on October 4, 2023
When you take a loan you decide the number of years it will take you to comfortably repay the same. This term tenure in loans is this period. Given here is the detailed meaning of this term and other details.
Meaning of Tenure in Loans
Loan tenure, also known as loan term or repayment period, is the length of time over which you are committed to repaying the borrowed funds to the lender. It is usually measured in months or years. The tenure for loans depends on many factors including the type of loan and and the repayment capacity of the borrowers. The loan tenure has a direct impact on your monthly instalment amount. In general, if you choose a longer tenure, your monthly instalments will be smaller, but you’ll end up paying more in total interest over the life of the loan. On the other hand, a shorter tenure will result in higher monthly instalments but lower overall interest costs.
Factors to Consider When Choosing Loan Tenures
There are several factors to consider while choosing the loan tenure for any loan. Borrowers should primarily start by assessing their financial stability and repayment capacity. Opting for a shorter tenure is advisable if they can comfortably afford higher EMIs, as it will help save on interest costs in the long run. On the other hand, if their cash flow is limited, a longer tenure with lower EMIs may be a better choice, even though it will increase the total interest paid. Additionally, individuals should consider their future financial goals and the loan’s purpose. Shorter tenures may be preferable for loans like personal loans, while home loans can have longer tenures.
Understanding the tenure in detail
Loans are often structured using an amortization schedule. This means that each monthly instalment consists of both principal and interest components. As the loan tenure progresses, the proportion of instalments dedicated to repaying the principal increases, while the interest portion decreases. It’s essential to check whether the loan agreement allows for prepayment or foreclosure (paying off the loan before the designated tenure ends) and if any penalties or charges are associated with it.