Many banks are now offering 30-year tenure loans to woo customers especially those from lower income groups and just-employed youngsters. But are these scheme really beneficial to the borrower? Or are they alluring the customers to reap more profits? Let us have a look at this. First, let us consider the plus-points of 30-year tenure loans.
Eligibile for higher loan
You will be eligible for an increased amount of loan as the banks tend to normally consider 40 to 50 per cent of your salary as your repayment capacity. Suppose your salary is Rs 50,000 and you go for the 30-year tenure loan with 10.5 per cent interest rate; you can avail up to Rs 27 lakh with an EMI of Rs 24,698. On the other hand, when the repayment period is for 20 years, you will be eligible for a loan of Rs 25 lakh as the EMI comes to Rs 24,959. So naturally, you may find it lu-crative to opt for the 30-year tenure loan sin-ce the additional amount will be of much help to you.
Smaller EMIs
EMI amounts will be smaller if the repayment period is longer. In the above-mentioned example, if the loan is taken for 30 years, you pay lesser EMI by more than Rs 2,000. In case of loans above Rs 50 lakh, the difference in EMIs will be more than Rs 5,000 which is great relief to borrowers with tight finances.
Avail tax benefits for longer period
If you are a tax payer, you can reduce your cost of loan by opting for longer duration loans as you can avail tax deduction upto '2.5 lakh per annum on your principal and interest payments. By doing so, you can save some income and invest it in some other high interest yie-lding investments and thereby reduce the cost of your loans.
Now let us take a look at the negative points of the 30-year tenure loans.
More interest payment
The main negative factor of longer duration loans is that you end up paying more interest. In the above example of Rs 27-lakh loan for 30 years, the total sum paid towards interest amounts to Rs 61.91 lakh which is more than double of the principal amount. But if you had opted for the 20-year tenure, then interest paid would have been only Rs 37.69 lakh. So, you ended up paying Rs 24 lakh extra towards interest by opting for the 30-year repayment option, simply to save Rs 2,258 per month on EMI payments.
Burden of loan
The burden of a liability will be with you for a longer period — for 30 years. Further, the interest rates are ever increasing and you may have to pay off more if your loan period extends to longer durations. Suppose you are paying interest at 10.50 per cent presently, but it increases to 11 per cent after a 20 year period due to inflation and other reasons. Then you will have to pay increased EMIs or request the lender to extend the loan period to some more yearsto retain same EMIs.
How to use opportunity and use it in your favour
A little bit of prudence can make things better for you even when opting for the 30 year tenure. Many repayment options are available in market like the Step Up Repayment Facility, Flexible Loan Instal-ment Plan, Home Saver Acc-ount, Accelerated Repayment Scheme, etc.
So, by planning your requirements and repayment and leaving some scope for saving some amount of int-erest, you can turn the longer period loans to be beneficialsoon after availing the loan.
Step up repayment option
Under this scheme, you will be paying lesser amounts of EMI at the beginning and go on increasing at preset intervals in proportion to your expected rise in income.
Flexible loan instalment
This option also offers flexible instalments. You pay higher EMIs at beginning and lower EMIs towards the end period. This is also a good for joint loan takers with varying service periods left. As you pay higher EMIs at beginning, more principal gets repaid earlier and the overall interest amount lessens to a great extent.
Accelerated repayment
This scheme also involves varying EMI payments but in an increasing pattern. As and when your income increases, your EMIs also increase and loan gets repaid quickly. Further whenever you receive some lump sum payments like bonus, extra allowance, etc., you can pay those amounts to lessen your burden. This in turn decreases the interest on your loan to a great extent and your entire loan gets repaid very quickly.
Home Saver Account
This is one of the best choices to opt for in getting rid of your loan very quickly and that too beneficially. Under this scheme, you can link your current / savings account to the home loan account and shift your excess savings to loan account. Your entire loan will get repaid much earlier in this way, thus saving a lot in interest.
(The writer is the CEO of bankbazaar.com)
