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Choosing between a Short-Term or a Long-Term Home Loan

New Delhi, Agencies | Updated : 30 September 2019, 05:11 PM
Choosing between a Short-Term or a Long-Term Home Loan (Representational Image)
Choosing between a Short-Term or a Long-Term Home Loan (Representational Image)

Short term or long term home loans, both are of equal importance as they fulfil the urgent financial requirements of the customers. Both the types of home loans have their own merits and demerits attached. By considering the similarities and contrasts between short-term and long-term home loans, applicants can easily compare and choose the type of loan, as per their needs and convenience. Both the loans are equally preferred by the first time home buyers or customers with investment mind-set.

Now, let’s have some quick understanding regarding the usability of short term, as well as long term home loans.

 Short-Term Home Loan  Long-Term Home Loan
 Loan or credit card payments  Purchase of home/plot/apartment
 Rent payments  Starting a business
 Buying household appliances  Construction purposes
 Vacations  Retirement savings
 Weddings  Higher studies
 Insurance payments  Paying of mortgage

Total loan amount, income and savings of the borrowers are the foremost criterion in determining the requirement of short-term or long-term home loan. Financial institutions, NBFCs (Non-Banking Financial Institutions), HFCs (Housing Finance Companies) are the key providers of short- and long-term home loans. Lenders perform a thorough check on the applicants’ credit score, before sanctioning loan and the interest rates offered also depends a lot on your credit history. If in case you do not have a credit history or credit score, the chances of getting home loan sanctioned becomes less. However, if you are able to get a respective lender who is willing to sanction loan against you name, the interest rate offered will be comparatively higher.   

Short-term home loan:

Short-term loan are usually intended to fulfil instant money requirement of the borrower. Besides taking a home loan, this type of loan can also be used to pay credit card bills, overcome medical emergency, purchase of electronic items or expensive gadgets.

Features and benefits:

  • Short-term home loans ranges between 3-5 years
  • Less interest paid with short-term loan
  • Quick approval and instant loan amount disbursal
  • Fewer regulations to follow with less restrictions
  • Less or no impact on credit score
  • Scope of rebuilding credit history
  • No hassle in taking new loan, post repayment of existing loan
  • Less burden on borrower as compared to long-term loan, if availed
  • Re-payment possible by submitting lump sum amount

Demerits:

  • Higher EMIs to repay the loan in short duration
  • Higher interest rates
  • Stable, regular and sufficient income for eligibility and to repay
  • Lesser discounts on EMIs
  • Tax benefits can be availed for shorter period
  • People with low income find it difficult to opt for short-term loan

Long-term home loan

Long-term home loans are generally between 10-30 years, depending upon the requirement of the customer. The apartment or house acts as a security until the loan is paid-off in full. Due to high loan amount, the maximum repayment tenure offered by lenders is up to 30 years. Basically, home loans are offered for an amount that ranges between Rs. 15 lakh to Rs. 10 crore.

Features and benefits:

  • Long-term home loans ranges between 5-30 years
  • Low EMIs (Equated Monthly Instalments)
  • Few months EMIs get waived off by some lenders, if good repayment history
  • Customers avail tax benefits under Section-24 of Income Tax Act
  • Low interest rates possible, if planning for another loan
  • Increases home loan eligibility

Demerits:

  • Long-term loans are offered at higher interest rates
  • Adds financial burden post retirement of borrower
  • Credit score is negatively impacted,  in case of long term loans
  • Total cost becomes higher as compared to the principal amount

Home Loan Eligibility Criteria

Home Loan Eligibility Factors                          Home Loan Eligibility Criteria 
 Age of the Applicant  Minimum: 18 yrs. Maximum: 65 yrs. at the time of   loan maturity
 Minimum Income Eligibility  Rs. 15,000 per month
 Type of employment and
 work experience
 Salaried Professional, Self Employed are eligible.
 Minimum work experience should be
 3 years for salaried and 5 years for self-employed.
 Status of Employment  Regular: At least 1 year in   current job/business/profession or at least 2 years   of prior employment
 CIBIL score  At least 750 or above
 Loan-to-Value (LTV) Ratio  Up to 90% of Property value
 Eligibility with Co-applicant
 or Joint home loan criteria
 Up to 2-6 earning family members may
 be added to get higher loan eligibility


Things to consider before taking a home loan:

  • Research on available home loan options
  • Checking on the affordability
  • Home Loan processing fee
  • Deciding on maximum loan tenure
  • Choosing suitable EMIs
  • Maintaining good CIBIL score
  • Down payment of initial loan amount
  • Carefully checking the agreement documents
  • Pre-payment charges and other charge

Factors that determine the choice between loan types

Income:

Your income or salary directly influences the loan amount that you are worth of. This factor directly impacts your choice between short- or long-term home loans. With high monthly salary, an individual can opt for short-term home loan, as the customer can easily handle the burden of high EMIs with his/her monthly salary or income. However, people with low salary should not choose short-term loan, as the high EMI burden may shake their budget. 

Rate of Interest:

Second most important factor is the rate of interest offered by the respective lender. Rate of interest is the cost of credit that you require to pay for availing a home loan. Calculation of EMI can be done by the home loan EMI calculator provided by various online lending portals, as it helps in the budget planning of your finances.

Age:

Age is considered to be one of the foremost factors in deciding loan amount, as age signifies the home loan tenure that can be availed for desired loan options. In simple words, older you are the home loan tenure is reduced and vice versa. Long term loans can easily get sanctioned if the applicant is in his/her 20s, as the loan repayment time span is longer. Whereas, if the applicant is in his/her 50s then option of taking long term loan is not offered by financial institutions and they are left to avail only short-term home loan. Sometimes Government policies also affects home loan eligibility.

Home loan, whether it is a short term or long term, acts as a saviour for people who are in desperate need of money. It fulfils the instant requirement of credit that makes it feasible for customers to face the urgent or unforeseen situation of financial crunch. 

(This story has not been edited by News Nation staff and is auto-generated from a syndicated feed.)

First Published: Monday, January 07, 2019 04:06 PM
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