Should you increase your loan?

Managing loan repayments can be challenging when monthly obligations seem overwhelming. A common option considered by borrowers is to extend the tenure to reduce monthly installments. While this approach may reduce short-term financial pressure, it also impacts the total interest paid over time. It is important to understand this agreement before making a decision.

What does tenure extension really cost?

A clear example can illustrate the trade-off. A personal loan of Rs 5 lakh for a tenure of 36 months at 13% per annum gives a premium of around Rs 16,900, which works out to a total interest of around Rs 1.08 lakh. Extending the tenure to 60 months reduces the EMI to around ₹11,400, giving a relief of around ₹5,500 per month. This cut could ease short-term financial pressure.

However, the full payment in 60 months increases to around ₹1.84 lakh, which is around ₹76,000 more than the 36-month option. In fact, the borrower pays much higher interest to reduce the burden. The decision should depend on whether the amount reduced is a necessity and how the additional cash flow will be managed. The impact also depends on the applicable rate, as even small changes can significantly affect the final cost.

When is extending tenure the right option?

Increasing the period can help in understanding that the current amount is becoming difficult to manage and there is a risk of missing payments. Lower amounts can reduce monthly pressure, protect emergency savings and help maintain a healthy repayment record. While the overall cost increases, it may still be better to avoid damaging your credit score by delaying payments.

When is this a wrong choice?

If the existing installment is still affordable and the goal is only to make money for additional expenses every month, then extending the tenure may not make sense. In such cases, the additional cost paid over time may not provide any meaningful financial benefit. This is not a long-term solution if the real issue is poor budgeting or persistent overspending.

Better option: Part-prepayment to reduce EMI

For borrowers who find the monthly amount too high but have access to a lump sum, partial prepayment may be a suitable option. This reduces the outstanding principal amount. The borrower can then ask the lender to recalculate the repayment based on the lower balance while keeping the balance tenure unchanged.

This results in a lower amount without increasing the repayment period or increasing the total interest paid. These digital tools can be helpful in estimating the revised amount after prepayment, making it easier to compare this option with extending the tenure before making a decision.

Using a Calculator to Make Decisions

If you have a personal loan, the calculator is one of the most reliable tools to help you make a decision with real numbers instead of estimates. By entering the current outstanding principal, rate and different tenure options, you can clearly compare the monthly payments and total interest for each scenario. Checking multiple tenure combinations only takes a few minutes and helps remove the guesswork from the decision-making process. It will also let you see how changes in the personal loan interest rate can affect both the EMI and the overall repayment cost.

conclusion

Extending the loan tenure can be a useful way to reduce the monthly payment amount, but it comes with higher overall interest costs. The right decision depends on your financial situation, repayment capacity and long-term goals. In some cases, this may provide needed relief and help maintain repayment discipline. In others, if the EMI is already manageable it may increase the total cost without adding any real value.

Before making a decision, it is important to compare all the available options, including part-prepayment and restructuring, using clear calculations. Tools like EMI calculators can help you understand the impact of each option. A well-informed decision ensures that short-term comfort does not lead to long-term financial stress.

Disclaimer: No Business Standard journalist was involved in the production of this content