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Tips to pay off your loans and the benefits of repaying early

Before you start repaying loans, make sure you have an adequate investible surplus for meeting your long-term goals.

If you are servicing any kind of loan such as a home loan, personal loan, education loan, gold loan, or even a credit card loan, getting rid of the outstanding amount should be your first priority. Remember, any return that you are earning on your investments including equity funds or deposits will get set off to the extent you are paying interest on any loan. With no debt, your real earnings on your investors begin and will help you create wealth over the long term. Avoid over-dependence on loans and put a plan in place to meet your goals judiciously from your income.

So, when it comes to paying off your loan, there are certain things to keep in mind. There are 3 key benefits in doing so:

  1. Will keep interest burden less
  2. Will help in getting rid of debt completely
  3. Will help in creating an asset by taking a loan

Before you start repaying loans, make sure you have an adequate investible surplus for meeting your long-term goals. The funds earmarked towards children’s education, marriage, or own retirement need not be re-directed towards paying off loans unless required.

Start repaying loans that carry the highest interest rate. The credit card outstanding carries a high rate of around 42 per cent per annum and, therefore, should be initially paid off. Stop making fresh purchases on the credit card until all dues are cleared by you.

Next, look at personal loans but before repaying take into account the prepayment charges if any. All consumer loans that you go for while purchasing white goods such as washing machines or even your smartphones are personal loans in nature. Calculate the interest charges that you will save by repaying against the prepayment charges and the processing fee that you would have incurred. If there is more than one personal loan, make a plan to repay them as early as possible. The loan that is nearing completion may be continued while the new loan may be stopped earlier. Similarly, the car loan, gold loans, loans against FDs need to be paid off as and when you have a surplus amount after factoring in the prepayment charges.

Your home loan can be the last pit-stop and focus on its repayment only when you have got rid of personal loan, credit card dues etc. A home loan is the only constructive loan as it helps in creating an asset that has the potential to appreciate in value. Along with that paying off an education loan can be done later as both home loan and education loan comes with tax benefits that you may avail of.

Source Financial Express | 07/05/2021