If you have taken out several loans for various reasons and are having financial difficulty repaying them simultaneously, which loan should you repay first?
Ideally, one should limit one’s expenses to the amount one earns. However, to buy long-term assets like a house to save on rent, machinery to improve earning capacity, etc., or for higher education to improve employability, one may need a significant amount. In such cases, to add value and/or to increase income, there is no harm in taking out loans instead of spending time accumulating funds and missing out on opportunities.
However, taking out a loan creates an obligation to repay it with interest. Avoid borrowing to buy luxury items, which are inherently depreciating and do not add value or improve earning capacity.
If you have taken out several loans for various reasons and are having financial difficulty repaying them simultaneously, which loan should you repay first?
“When an individual takes out a loan, the immediate and obvious priority is to repay it. However, having a home loan (as well as other financial obligations) for a longer period could be an advantageous arrangement. It has some hidden features that an individual might appreciate,” said Rajat Gandhi, Founder of Faircent.com.
“Therefore, paying a credit card bill or a personal loan should be prioritized over a home loan,” he added.
Gandhi lists the following three reasons, describing why putting the mortgage last is not a bad idea after all:
Lowest interest rates
Home loans have the lowest cost or interest rates (compared to others). Therefore, it is best to pay off loans – credit cards and personal loans – with the highest interest rate first. They have interest rates as high as 40 percent. In comparison, some financial institutions offer home loan rates as low as 6.5-7% for selected applicants.
Fiscal advantages
Unlike a personal loan, credit card, or car loan, home loans offer a tax advantage on interest and principal repayment. Under Section 80C of the Income Tax Act 1961, home loans have benefits such as tax savings on principal and interest payments, which prove useful in the long run. term because a house is an appreciating asset.
Asset Creation
A home loan allows you to build up your assets. A consumer loan or auto loan can also help you buy and own property, but they depreciate. There’s no greater sense of achievement than prepaying a loan or foreclosing it. While doing the same, keep in mind that there may be additional prepayment penalties in the case of a personal or car loan. Home loans, on the other hand, are generally exempt from such penalties (however, it is always best to have this checked with your bank or financial institution). Remember to get a NOC after paying the full closing cost and get the same update on the credit authority database.
“Even if repayment of a loan is an obvious answer. However, in case of multiple financial obligations, it is advisable to pay the home loan last for the reasons mentioned above,” Gandhi said.