When it comes to taking a loan, the tenure you choose can significantly impact your finances. Should you opt for a shorter tenure with higher monthly repayments, or a longer one with smaller instalments? The answer depends on your cash flow, long-term goals, and appetite for interest costs. Let’s break it down so you can make the best decision for your budget.

1. Shorter Loan Tenure: Higher Monthly Payments, Lower Interest Costs

A shorter loan tenure means you’ll repay your loan faster, which can save you a significant amount on interest.

• Who It’s Best For: If you have strong cash flow or a stable income, a shorter tenure allows you to clear debt quickly and save on overall costs.
• Benefits:
  • Reduced total interest paid over the life of the loan.
  • Faster debt clearance, giving you financial freedom sooner.
• Considerations:
  • Higher monthly instalments may strain your monthly budget.
  • Less flexibility for unexpected expenses.

Example: On a $500,000 loan at 2.5% annual interest, a 10-year tenure might save you tens of thousands in interest compared to a 20-year tenure.

2. Longer Loan Tenure: Lower Monthly Payments, Higher Interest Costs

Opting for a longer tenure spreads out your payments, reducing the monthly burden but increasing the total interest.

• Who It’s Best For: If your cash flow is tight or you have other financial priorities, a longer tenure can make your loan more manageable.
• Benefits:
  • Lower monthly payments free up cash for other expenses or investments.
  • Greater flexibility to handle financial emergencies.
• Considerations:
  • Higher total interest paid over the loan’s lifespan.
  • Prolonged financial commitment.

Example: The same $500,000 loan at 2.5% interest might cost you significantly more in total interest over 30 years compared to 20 years.

3. Evaluating Your Cash Flow

Start by assessing your monthly income and expenses. Use this formula:

Disposable Income = Total Income - (Fixed Expenses + Variable Expenses)

• If your disposable income comfortably covers a higher monthly instalment, a shorter tenure might be better.
• If cash flow is tight, a longer tenure could ease monthly stress.

4. Weighing Interest Costs Against Opportunity Costs

• A shorter tenure reduces interest, but higher payments might prevent you from investing or saving elsewhere.
• A longer tenure costs more in interest but frees up funds for potential investments or emergencies.

5. Aligning with Your Long-Term Goals

Think about how the loan tenure aligns with your financial plans:

• Do you aim to be debt-free before retirement?
• Are you planning major life changes, like starting a family or buying another property?
• How important is financial flexibility for your peace of mind?