While applying for a home loan, just as important it is to plan your finances, it is critical to choose the right loan term as it has a direct impact on repayment. Is short-term loan better than long-term loan or vice versa? Read on to know more.
After living in a rented home for several years, have you decided to move into your own home? Unless you have saved a significant amount, you may invariably look for a home loan to get the desired funds for buying your dream home. Today, if you do a simple online search for the best home loan offer, you will find that there are plenty of lenders in the market who are willing to offer the loan at competitive interest rates. However, before you apply for a loan, you must do your research well to find the most affordable offer that suits your needs.
Apart from looking for the best lender who offers the loan at the lowest interest rate, you must also carefully consider the loan tenure before making the final decision. You must assess your finances, understand your repayment capacity, and decide whether you want to choose a short-term loan or go for a long-term loan.
Let’s understand the difference between the two.
· Loan tenure
In terms of tenure, the long-term loans are usually availed for more than five years. Most of the lenders in India offer home loans for a maximum period of 30 years and people usually opt for a loan ranging from 15-25 years. This gives them plenty of time to repay the amount.
For short-term loans, the tenure is usually five years or less. However, when it comes to short-term home loans, it can extend up to 10-12 years.
· Mortgage period
Since a home loan is a secured loan, the lenders use the property you buy as a collateral against the amount you borrow. This means, the property won’t be entirely in your name until you repay the amount in full. So, when you apply for a long-term loan, the property will be mortgaged for a longer period.
If you are looking to be debt free faster, and want to get complete ownership of the home, you can opt for a loan for a shorter duration. When you pay off the full amount make sure that you collect the NOC or ‘no-due’ letter from the lender. It is essentially a letter that states that you have paid the loan completely and the lender has no ownership over the property.
· Interest rate
When you talk about home loans, it is impossible not to talk about the rate of interest. Since long term home loans are spaced over a couple of decades, the lenders usually charge lower interest.
Since the tenure is smaller, the financial organisations charge a higher interest rate on short-term loans to compensate for the shorter loan period. So, longer the home loan tenure, lower the home loan rates and vice versa.
· EMI amount
Since the long-term loan allows you to repay the amount for a longer period, the monthly EMI amount will be lower and affordable. However, the total interest payment will be higher.
Since short-term loans are spaced over a smaller period, the EMI amount is usually high. But, the total interest you pay is less.
Short-term loan or long-term loan – which is better?
As evident from the above comparison, there is no single best choice. You must choose the loan tenure based on your repayment capacity and needs. If you want the EMI to be affordable, you must choose a long-term loan. But, if you have the capacity to pay high EMIs and want quick disbursal, you can opt for a short-term loan.