How to Choose the Ideal Repayment Tenure for Business Loans?
Business loan interest rates might be the only factor that you consider when taking such financing. Comparing the rates offered by different lenders will be a priority before choosing the most affordable one.
One of the other factors that you should also consider in addition to interest rate is your loan tenure. The majority of lenders in India have business loans tenures from 12 to 60 months.
What you need to figure out is which loan tenure will suit your finances. The loan tenure will determine the total repayment which you will make. It includes the principal plus the total interest that you pay on it.
For example, say you have taken a loan amounting to Rs. 5 Lakh at 12% rate of interest for 5 years. The total interest that you have to pay will be around Rs. 1.67 Lakh. Hence, your total repayment stands at around Rs. 6.67 Lakh.
You can calculate the cost of loan by using a business loan EMI calculator.
The cost of loan will depend on the tenure. Longer the tenure, higher the total interest payable. On the other hand, your overall interest will remain low if you opt for a shorter tenure with the same principal and rate of interest. But this will consequently mean higher EMIs.
Read on for a better idea on how to choose the best tenure for your loan
1. Rate of interest
The rate of interest you get will depend on your credit score and credit history. Generally, lenders prefer borrowers that have a credit score of 750 or more. Such a good credit score can be achieved if you manage your finances responsibly.
Lenders provide a lower rate of interest to borrowers that hold such a high credit score. Moreover, you may also get to have other features with the same.
For example, Bajaj Finserv provides pre-approved offers on loan amounts up to Rs. 30 Lakh that lower the time taken for availing financing by making the process hassle-free. Pre-approved offers come with personal loans, home loans, business loans, and several other financial products and services. You only have to provide a few necessary details to check your pre-approved offer.
You can go for a shorter tenure if you have received a lower rate of interest. Your EMIs will be affordable, and you will get to repay the loan faster. Shorter tenures with a high rate of interest will make your EMIs expensive. Hence, opting for a longer tenure is preferable here.
On the other hand, your business loan interest rate will be high if you don’t have such a high score. In that case, you can go for longer loan tenure. Longer tenures will come with a higher rate of interest.
2. Your loan principal
The principal that you opt for will be another determining factor for the tenure in addition to the business loan interest rate.
You can opt for a shorter tenure if you are going for a smaller amount. Repaying the amount quickly keeps the rate of interest and the total interest that you pay low.
On the other hand, you can go for a longer tenure if you have applied for a high amount say more than Rs. 20 Lakh. Your EMIs become more manageable as they are affordable.
However, you can take a shorter tenure for a more substantial loan amount if your business revenue is high. Your cost of loan will be low, and you can also foreclose it with an additional charge.
3. Your fixed monthly obligations
Monthly fixed obligation or the expenses that you must pay every month is another factor to consider while choosing the loan tenure. Lenders consider the FOIR or fixed obligations to income ratio of a borrower when they apply for a loan.
You should go for a longer tenure if your monthly obligations are half or 50% of your income. Your total payable interest will be high, but your EMIs will be more manageable.
Keep in mind the business loan interest rates can be calculated with an EMI calculator along with the loan tenure. Business owners should stick to the best financial habits and get the best terms on your business loan.