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Which loan should you Repay First- Home Loan or Personal Loan?
Posted on Wednesday, October 19th, 2022 | By IndusInd Bank
Having instant cash in our account boosts purchasing power; however, excessive dependence on it can lead you into the debt trap. So, it’s wise to treat any kind of loan just as a loan – a financial responsibility that you need to repay to avoid any kind of financial stress. Also, loan repayment can become stressful if you are not careful about how you manage your finances effectively. Moreover, some people also take another loan while paying a pending one. Although there is no limit to the number of loans you can take, you should consider your ability to afford them, your income, and your overall budget to ascertain whether you can conveniently pay them all. So, if you have personal loan charges and a home loan, then keep on reading about how to prioritise to stick to your financial commitments.
Cost of Loan
Everyone wants to stay debt-free and to achieve this, you may want to pay off the largest loan first or even the smallest one first. However, from a financial standpoint, the interest rate or the overall cost of a loan determines the size of the outstanding debt. Let’s say if you have a personal loan that you acquired at the best rate and a home loan at a high cost, then it would be ideal to make payments towards the home loan to close it. However, generally, home loans are cheaper than personal loans and it makes sense to pay off the personal loan. Only in certain cases if an employer-backed personal loan has a lower interest rate than a home loan, would require you to pay off the PL loan first. Home loans in India on average start at around 8.75 percent and personal loans are costlier standing up to 10 to 14 percent onwards. However, you can find a personal loan at less interest rate here.
Tax Benefits
It is noteworthy to know that there is no tax benefit on the repayment of a personal loan; however, you can get a deduction of up to INR 1.5L per annum towards the repayment of the principal amount under Section 80C. Furthermore, you can also claim a deduction on the interest paid on the EMI for a home loan for up to INR 2L under Section 24. Therefore, multiple benefits linked with a home loan help reduce your overall tax liability and you can conveniently pay them off as per schedule. Many banks charge when you prepay towards your home loan, but here at IndusInd Bank, there are no charges on home loan prepayment when loans are availed at the floating interest rate.
Pre-payment Option
Usually, there are penalties involved when it comes to the prepayment of any kind of loan. However, if you have availed of a personal loan at the lowest floating interest rate then there will not be any charges levied for prepaying it.
The Bottom Line
There are certain kinds of loans that you should close as soon as you can, but with larger loans such as a home loan, you are better off diverting the extra cash towards paying off high-interest loans. When it comes to a home loan, you pay more towards the interest payments, and it is in the last tenure years of it that you start making payments towards the principal amount. Therefore, it makes sense to avail all the tax benefits that you can get initially and start paying off personal loans. If you consider only the tax benefits, then you should pay off the home loan after paying off other loans.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
