Understanding Loan Tenure
Loan tenure is the time period within which you need to repay your loan completely. It directly impacts both your monthly EMI and the total interest you pay over the life of the loan.
How Loan Tenure is Calculated
The tenure depends on three factors: loan amount, interest rate, and EMI you can afford. The formula uses logarithms to determine how many months it will take to pay off the loan:
Tenure (N) = log(EMI / (EMI - P×R)) / log(1+R)Where P = Principal, R = Monthly interest rate, EMI = Monthly payment
Impact of Tenure on Total Interest
Let's see how tenure affects total interest for a ₹25 lakh loan at 8.5% interest:
| Tenure | Monthly EMI | Total Interest | Total Payment |
|---|---|---|---|
| 10 years | ₹31,255 | ₹12.5 lakhs | ₹37.5 lakhs |
| 15 years | ₹24,606 | ₹19.3 lakhs | ₹44.3 lakhs |
| 20 years | ₹21,695 | ₹27.1 lakhs | ₹52.1 lakhs |
| 25 years | ₹20,156 | ₹35.5 lakhs | ₹60.5 lakhs |
⚠️
Key Insight
Doubling the tenure from 10 to 20 years nearly doubles the total interest paid, even though the monthly EMI reduces by only ₹10,000!
Choosing the Right Tenure
Opt for Shorter Tenure If:
- You have stable, high income
- You want to save on total interest
- You're young with long earning years ahead
- You plan to be debt-free quickly
Opt for Longer Tenure If:
- You want lower monthly burden
- You have other financial goals to pursue
- You can invest the saved money for higher returns
- You're nearing retirement
Smart Strategies for Loan Tenure
- Start with Lower EMI: Choose longer tenure initially for flexibility
- Make Prepayments: Use bonuses and windfalls to reduce principal
- Increase EMI Periodically: Match EMI increases with salary hikes
- Balance Transfer: If you get lower rates elsewhere, consider switching
- Don't Max Out: Keep EMI below 40-50% of income for financial flexibility
Minimum EMI Requirement
Your EMI must be higher than the monthly interest on the loan. For example:
- Loan Amount: ₹25,00,000
- Interest Rate: 8.5% per annum (0.708% per month)
- Minimum EMI = ₹25,00,000 × 0.00708 = ₹17,700
If your EMI is below this, you're only paying interest without reducing the principal, and the loan will never get paid off!