Long-Term vs. Short-Term Personal Loan: When taking a loan, most people make their decision based solely on the EMI. They often believe that a lower EMI is a more profitable option, but the real challenge lies in the loan tenure. A long-term loan increases the EMI, but the overall interest is lower. A short-term loan, on the other hand, reduces the EMI, but the overall interest is higher. Let's understand this:

Suppose you took out a loan of ₹5 lakh at 12% interest. Now, if you repay it in 3 years, the EMI will be higher, but the total interest will be lower. However, if you repay it in 5 years, the EMI will be lower, but the interest may increase by thousands of rupees. Therefore, when taking a loan, it's important to consider not just the EMI, but also the total repayment.

When to choose a short-term loan?
If you have a stable income and are saving every month, a short-term loan may be better. This allows you to become debt-free quickly and start investing for the future. It also gives you the peace of mind that the loan will be repaid quickly. However, if you are self-employed or have irregular income, a high EMI can be risky. A shortfall in your monthly balance could lead to EMI default, which could incur penalties and impact your credit score.

How to Make the Right Decision?
First, add up all your monthly expenses, such as rent, school fees, insurance, other EMIs, etc. Try to ensure that all loans combined do not exceed 40-50% of your net income. If choosing a short-term loan exceeds this limit, a long-term loan may be wise. However, if the interest rate on the loan is 14-16%, it may be beneficial to repay it early.

What to Do About Home Loans?
Home loans have low interest rates and also offer tax benefits (Section 24 and 80C). Therefore, taking a long-term loan and simultaneously investing can be a good option.

In this way, you can choose the right option, from both keeping in mind your income and needs.

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