Understanding Micro Loan Tenure and Repayment Terms: A Comprehensive Guide

Are you considering a micro business loan but feeling overwhelmed by the concept of loan repayment, tenure, and interest rates? Don't worry, you're not alone. Understanding the terms of a loan can be confusing, but it's an essential aspect of managing your finances effectively. Read on for more information on micro loans from Ujjivan SFB, your trusted partner, who remains committed to serving the unserved and underserved segments of society.

The Basics of Micro Business Loan Tenure

Micro business loan repayment tenure refers to the duration or length of time within which the borrower is expected to repay the micro loan in full. During the tenure period, borrowers need to repay the loan in regular instalments, typically on a monthly basis. Each instalment consists of both principal and interest components. As you progress through the repayment period, the proportion of principal in each instalment increases while the interest portion decreases. The repayment tenure of micro loans is usually up to 36 months or 3 years, within which the borrower has to repay the entire loan amount.

During the loan application process, you will be provided with various options for choosing the loan duration. The tenure typically ranges from a few months up to a year or more, depending on the lender's policies and your eligibility criteria.

Several factors can influence the tenure of a micro loan:

• Loan Amount: Generally, smaller loan amounts have shorter repayment tenures, while larger amounts may require longer repayment periods.
• Borrower's Income: The borrower's income plays a crucial role in determining the loan tenure. If the income is higher, lenders may offer shorter tenures as they assume that the borrower will be able to repay the loan quickly.
• Interest Rate: The interest rate depends on the type of loan you’re applying for and your creditworthiness. 
• Purpose of the Loan: The purpose for which the loan is taken can also impact the loan tenure. For example, a business loan may have a longer tenure compared to an individual loan.

Understanding Repayment Terms of Micro Loans

Repayment terms refer to the conditions or terms under which the borrower is required to repay the loan amount. It is important to understand the repayment schedule before availing of a micro loan as it directly impacts your monthly budget and financial planning.

Now, let's demystify micro loan repayment terms:

1. Equated Monthly Instalments (EMIs)

EMIs are fixed monthly payments that borrowers need to make towards repaying their loans. These payments typically include both principal and interest components.

You can calculate EMIs using an online calculator.

Example: Let's say you took a micro loan of ₹1,00,000 at an annual interest rate of 25% for a tenure of 12 months. Using an EMI calculator, you find that your monthly EMI would be ₹9,504.

2. Grace Period

Some lenders may offer a grace period before the repayment starts. This period allows borrowers to get their finances in order before they begin repaying the loan.

3. Interest Rates

Interest rates play a crucial role in determining the total cost of your micro loan. The higher the interest rate, the more you'll end up paying over the loan tenure. It's essential to compare interest rates offered by different lenders before making a decision.

Example: Let's consider two lenders offering micro loans: Lender A with an interest rate of 25% per annum and Lender B with an interest rate of 28% per annum. Both lenders offer a loan amount of ₹1 lakh with a tenure of 24 months.

Lender A offers a lower interest rate compared to Lender B. Therefore, it's important to consider interest rates when choosing a lender for your micro loan.

4. Loan Duration

The loan duration has a direct impact on the EMIs and the total interest payments you make over the loan tenure. Generally, shorter duration result in higher EMIs but lower overall interest payments.

Example: Let's compare two scenarios to understand how loan duration affects your repayment:

Scenario 1: Loan Amount: ₹1 lakh | Interest Rate: 25% | Tenure: 12 months

Monthly EMI is ₹9,504 and the total interest paid over the tenure is ₹14,053.

Scenario 2: Loan Amount: ₹1 lakh | Interest Rate: 25% | Tenure: 24 months

With a longer tenure, monthly EMI reduces to ₹5,337. However, the total interest paid increases to around ₹28,092.

As you can see, opting for a longer tenure reduces the monthly burden but increases the overall interest cost. It's essential to strike a balance between manageable EMIs and minimising interest payments based on your financial situation.

5. Prepayment and Part-Payment Options

Some micro loans may allow borrowers to make prepayments. Prepayments refer to repaying the loan in full before the agreed-upon tenure, while part-payments involve making additional payments towards the principal amount during the loan tenure.

Before making any prepayments or part-payments, it's crucial to check with your lender about any penalties or charges involved. Making prepayments or part-payments can help you save on interest payments and shorten the loan tenure. By reducing the outstanding principal, you effectively decrease the interest charged on future EMIs.

Example: Suppose you have a micro loan of ₹1 lakh with an interest rate of 27% and a tenure of 12 months. After six months, you receive a bonus and decide to make a part-payment of ₹40,000 towards the principal amount.

In this scenario, your outstanding principal reduces from ₹1 lakh to ₹60,000. As a result, your future EMIs will be recalculated based on the revised principal amount. This leads to lower EMIs for the remaining tenure and reduced overall interest payments.

6. Late Payment Penalties

Late payment charges can significantly increase your repayment burden, so it's crucial to make timely payments to avoid any penalties. Ensure that you understand the late payment penalties imposed by the lender in case of delayed or missed payments. 

Disclaimer: Kindly note that the above examples are generic in nature. Please contact Ujjivan Small Finance Bank to know about business loans in detail.