Which loan do we Repay first -Home or Personal?

Although in all our previous post we have been advocating the fact that loans should be utilized only when extremely necessary, taking loan has become the way of life. Many might deny the fact that we don't have any sort of loan or EMI payment on ourselves, but what they ignore is that using their credit card indiscriminately is also kind of a loan. So, to lead a loan free life it is essential that we schedule repayment of our loans at regular time intervals. It boosts our monthly surplus as well as give a peaceful mind.

We have been discussing few asset based loans in previous few posts(refer to our November 2015 posts for more information at www.saarthifp.blogspot.in). Considering the above and the traditional other loans, we should prioritize the loan repayments in the following order:

Priority 1: Personal loans

Target your repayment with this short term but high on interest Personal loans. The loan is given based on the credit history of borrower and his repayment capacity i.e. Income. The end use of the loan is not defined and is usually preferred for splurging on more of wants rather than wants of individuals. It is an unsecured loan thus , they are often offered at a higher interest rate with higher EMI payments. Similarly is the credit card repayment which needs to be equally prioritised.

 

ROI	13.00%
Period of loan	4 years
Amount of loan	6,00,000
EMI	16,096
Total repayment made in 4 years	7,72,632

Priority 2: Asset based loans

The asset based loans like gold loans, loan against property, loan against fixed deposits and insurance policies are usually borrowed for some unplanned requirements. Such loans should be looked to be repaid as they are just have an additional interest burden. Although, the amount of loan in gold and property is determined on basis of asset value and it is just acts like an overdraft facility for actual funds used. (Read more about the features at our previous blogs at www.saarthifp.blogspot.in ). In all the earning capacity of these assets is not more then the charged interest rates, hence they should be repaid after any Personal loan.

Priority 3: Home loan

Although ,Home loan is one of the commonly availed loans, we recommend to get rid of it at every possible opportunity. For years people have been harping the tax benefits associated with it but the truth is that the tax benefit is a very short term benefit versus a lost opportunity to invest the EMI savings elsewhere. The exit strategy for home loan also differs based on the tenure and type of house. in the housing loans, in the initial few years, most of the EMI payments are towards the interest payments and its only during the last few years of loan tenure that they account for principal repayments. Look to repay the loan in first ten years tenure of loan as the deduction for principal repayment is under usually crowded 80C whereas there is no limit for second home (for self occupied home limit is Rs 200000). So, as and when you get huge amounts or windfalls, plan to route it for home loan repayment.

ROI	9.55%
Period of loan	20 years
Amount of loan	25,03,000
EMI	23,413
Total repayment made in 10 years	28,09,563
Total repayment made in 20 years	56,19,127

Conclusion

It is very necessary that you analyze the pros and cons of whether to opt for an investment or to use the funds to repay the existing loan. It is necessary to decide your exit point for any loan and not make any emotional attachment to it.