Should you prepay your Loan !!!

Should you prepay your Loan !!!

Prepay your loan

Let’s play the game of loans!

Should you prepay your loan to have a home of your own?

We live in a society where taking loan is considered very bad. Particularly the older generation thinks it as a taboo and these beliefs are downloaded to the next generation in many cases.

But the demands of the modern life, the urge to buy your own house and many such reasons compel today’s generation to go for a loan (sometimes unnecessarily).

But once they take a loan (Housing, Car etc.) the old notion of ‘Loans are Bad’ comes back to haunt them. And it leads to a frantic drive to prepay the loans.

But does prepaying the loan always makes a financial sense??? The answer is Flat NO

Prepaying the loan makes sense only in the following conditions:

Your Loans are too High

vis-a-vis your assets (Solvency ratio) for e.g. you are running a loan of 1Cr  and you have assets in the tune of 40 lakhs only (Real Estate, Mutual Funds, FD’s etc.) then it’s a red flag and an unhealthy solvency ratio.

EMI to Income Ratio

If your EMI (all loans put together) is too high in relation to your take home income then prepaying your loan makes sense. So for example -your take home income is 1 lac and you are paying an EMI of 50000/- then it makes sense to reduce your liability and free up your cash flow.

Cost of Borrowing

It’s nothing but rate of interest for your loan. It is important to check the reason ability of the interest rate.

Normally Housing loans are quite cheap.

For example currently the housing loan rate is in the range of 8.75-9 % and if we consider the tax benefit the interest cost would be 6-7 %; but in case of personal loan, credit card loan the interest cost is too high.

So it is important to check the cost of borrowing before taking the prepayment decision.

So consider all the above points before you prepay your loans. And if the pointers are in your favour then it makes sense to use your surplus money to create a robust investment portfolio rather than use those funds for repayment

Otherwise you will end up with misguided peace of mind and an irrational financial decision.

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