Applying for a loan is a major decision and one of the big commitments a person makes in his or her life. It is important to be well-informed about your options and choices before, during, and after loan application. Among the various factors considered by banks to approve your loan, the two very significant ones are your age and the loan tenure. Lending institutes focus on tenure and age because they determine your EMI, eligibility for loan approval, and loan repayment ability. In this article, we will analyse these two factors in detail.
However, before we begin, let us understand the significance of EMI and how it is connected to age and tenure. As we have seen before, Equated Monthly Instalments or EMI is the fixed amount paid by the borrower to the lender at fixed intervals (monthly) towards the repayment of the loan. EMI consists of two parts â€“ Interest & Principal. When you begin to repay the loan, the â€˜interestâ€™ in the EMI is higher as the principal amount is high. But, as you progress with the repayment, the â€˜interestâ€™ in the EMI reduces, since the principal amount goes down.
Thus, what we understand from this is:
- The longer the loan tenure, the longer you will take to repay the loan
- The longer you take to repay the loan, the higher the interest amount you will pay
EMI and Tenure
Let us look at why and how the interest amount and total amount payable increase when you take a long time to pay the loan.
Suppose Mr. A has to repay a loan of Rs. 2 lakhs at the rate of interest of 13%.
|Loan Amount||Rate of Interest||Tenure (in years)||EMI||Total Interest||Total Payment (Principal + Interest)|
According to the table above, if Mr. A chooses to pay the loan in one year, he pays only the necessary due. If he decides to repay in three years, the interest and the total amount payable is much higher.
Thus, whenever you apply for a loan, assess your finances thoroughly to make an informed decision about the tenure. While most loans are not as small as Mr. Aâ€™s, you can still choose the lowest tenure possible. Check your previous savings (if any) and your monthly income and expenses, before you commit to a tenure. The only advantage of a longer tenure is the lower EMI. A lower EMI right now definitely lowers your monthly financial pressure. But keep in mind that you end up paying more than what it is worth.
Thus, when you hold a job, it is an assurance to the lenders that you will pay the EMI. When you hold a job and fall under the â€˜prime ageâ€™ bracket, you can choose a longer tenure to lower EMI and manage monthly expenditure. But remember that when you choose a longer tenure, you are creating revenue for the lending institute.
In the circumstances when you can or want to pay off the loan before your tenure ends, you can do so if there is a clause in the loan contract which specifies that:
- Pre-payment is allowed for free
- Pre-payment is allowed but involves penalty
- Pre-payment allowed after a specific duration (six months or one year or the duration decided by the lending institute)
- No pre-payment allowed (wherein you have to pay the loan in the tenure via EMI)
EMI and Age
It is no secret that your credit history, monthly income, and the organisation you work for, have a significant impact on whether or not you will receive a loan. But did you know that your age, though not a deciding factor, does influence whether your loan is approved and what your tenure can be? For people in their primes, getting a loan is easy. But for those approaching retirement, it is that much more difficult, if not impossible.
Theoretically, suppose Mr. A has a job in a reputed company, earns a six figure salary and a good credit score. He is 50 years of age and wants to apply for a home loan. Even though his profile looks perfectly alright and fully eligible for a loan, he might find it harder to get the loan amount he requires due to his age. Just as much as the lending institutes are there to lend money, they are also concerned with its recovery. In this case, Mr. A will retire in a decadeâ€™s time and, usually, home loan tenure is 15 to 30 years. The lenders will be concerned about how Mr. A will make the payments once he retires. A collateral (the house Mr. A is purchasing) indeed helps, but getting the loan sanctioned is difficult. Here, Mr. A can opt for a shorter loan tenure or get a smaller loan amount by making a bigger down payment on the house. Thus, when you hold a job but are approaching retirement age, the lending institutes take stock of your future ability to pay EMI, which affects loan approval.
The example above indicates an ideal situation. Whether the loan is sanctioned and the amount approved depends on individual cases and the type of loan one applies for â€“ personal loan, car loan, business loan, loan against property, etc. Mr. A could be applying for a personal loan at the age of 50, which could be approved a lot more easily, since the tenure is lower in case of personal loans. Also, Mr. A is a salaried individual in the example above. As a business owner, his profile would be a lot different. Thus, though there is no hard and fast rule that people in the higher age bracket do not get approved for a loan, age is a significant criterion in most loan applications processes.