In case you have taken a number of loans for various reasons and have fund crunch to repay them simultaneously, which loan should you repay first?
Ideally one should limit one’s spending within the amount one earns. However, to purchase long-term assets like a house to save on rent, machinery to enhance earning capacity, etc, or for higher education to enhance employability, one may need a large amount. In such cases, to add value and/or to enhance earning, there is no harm in taking loans instead of spending time on accumulating funds and missing the opportunities.
However, taking a loan creates an obligation to repay it with interest. So, one should avoid taking loans for purchasing luxury items, which are depreciating in nature and neither add value or enhance earning capacity.
In case you have taken a number of loans for various reasons and have fund crunch to repay them simultaneously, which loan should you repay first?
“The moment an individual takes up a loan, the immediate and obvious priority is to repay it. However, having a home loan (along with other financial obligations) for a longer period could be a beneficial arrangement. It has certain hidden features that an individual could enjoy,” said Rajat Gandhi, Founder, Faircent.com.
“Hence, settling a credit card bill or a personal loan should be a priority compared to a home loan,” he added.
Gandhi lists the following three reasons, describing why setting the home loan last shan’t be a bad idea after all:
Lowest interest rates
Home loans have the lowest cost or interest rates (compared to others). Therefore, it is preferable to pay off the loans – credit cards and personal loans – with the higher interest rate at priority. They have interest rates as high as 40 per cent. In comparison, some financial institutions offer house loan rates as low as 6.5-7 per cent for selected applicants.
Tax benefits
Unlike a personal loan, credit card, or auto loan, home loans provide a tax benefit on interest and principal repayment. As per Section 80C of the Income Tax Act, 1961, there are advantages to home loans, such as tax savings for both principal and interest payments, which proves to be helpful in the long run because a house is an appreciating asset.
Asset creation
A home loan lets you establish an asset for yourself. A consumer loan or vehicle loan can also help you buy and own an asset, but they depreciate. There is no greater sense of success than paying off a loan early or foreclosing on it. While doing the same, remember that there may be additional pre-payment penalties in case of a personal or auto loan. On the other hand, home loans are usually free of such penalties (however, it is always preferred to get it checked with your bank or financial institution). Don’t forget to obtain a NOC after paying the entire closure cost and get the same updated on the credit authority database.
“Even though payment of a loan is an obvious response. However, in case of multiple financial obligations, it is advised to pay the home loan last due to the above mentioned reasons,” said Gandhi.