Tiding over short-term and long-term loans

Sometimes a home loan borrower prefers to take a short-term home loan to finish the repayment quickly. While this helps in completing the repayment faster, managing a short-term home loan requires planning expenses well. Let us understand this with this example:

Srinidhi has taken a loan for Rs 40 lakhs. He prefers to completely pay off the loan in eight years. Srinidhi knows it will be a tough eight years to pull through, but the house will be his very own soon. At 11 percent rate of interest, his monthly EMI outflow comes to around Rs 60,000. This is a huge chunk of his monthly take-home. Srinidhi had opted for a short-term home loan as he dreads unpredictability. Had he taken a loan for a longer tenure, his monthly outflow towards repaying the loan would have come down drastically.

If you have taken a home loan for a very short tenure, as in the case of Srinidhi, your monthly commitment towards your home will be phenomenally high. And balancing other expenses alongside the home loan repayment will become quite a challenge. However, there are borrowers who opt for short tenure loans.

Let's explore how such borrowers can sail smooth and avoid the whirlpool of debt.

Imagine the financial state of your family in case you fall sick or temporarily go out of job? No one would want to default on home loans as people hold an emotional bonding to it. What will happen if the bank hikes the interest rate? Your EMI will shoot up immediately, reflecting the hike.

As a first step, avoid getting into newer debts. Forget about any other loans. Explore why you want to borrow more money and figure out a way to do without it. Short tenure loans are more difficult to manage when compared to long tenure loans. Hence, the borrower needs to be even more diligent and cautious.

Plan, plan and plan. Imagine you're in deep financial crisis. Seeking a new debt during this hour is the worst thing to do as the terms of the loan will not be in your favour. Try to set aside and plan well in advance for such crisis patches in life. This will ensure that you're not in a desperate financial situation where you have to borrow in unfavorable terms.

Short-term loans save you from high interest rate costs of long-term loans. However, if you're unable to meet the high EMI obligation, you may be forced to switch to a long tenure loan or take drastic measures like selling some asset to pay the EMIs. Prepare a monthly budget. Take into account your expenses, children's education and other commitments. Chalk out a plan where you can manage it with your current income level and fulfill your debt obligations also.

If you have other debts, try to clear them away one by one. If a borrower opts for a short tenure loan, it is important to remember that the next few years will be a tough ride. Try to manage your day-to-day expenses with cash on hand. Create an emergency fund. For those in heavy debt, no guide says they shouldn't be saving. This buffer can be of use in case of extreme financial or emergency situations.

Srinidhi can manage to repay the entire loan in eight years only if he plans his finances properly and prioritises his commitments. He can approach the lender again, if he has problems repaying the debt.