Home Loan or Personal Loan: Which One Should You Get Rid of First?

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25 JUNE, 2021

Availing a loan is a great way to meet your financial needs. You can avail a personal loan for short term needs while a big-ticket loan like a home loan for long term financial goal like owning a house. If you have both the loans, you might need to adopt some strategy for repayment. Here we make it easy for you to decide as to which one should you get rid of first.

Personal loans
Personal loans are unsecured loans, and hence they are relatively expensive compared to secured loans. Though you would be required to pay your personal loan EMIs regularly, you must try to close this loan as soon as possible. You can consider making use of your bonuses, increments, or any other additional income to prepay your personal loan. Do not forget to make a note of the prepayment charges before prepaying the loan.

Home loans
Home loans are secured loans. Therefore, the home loan interest rates are lower as compared to personal loans. Home loans are usually long-term loans and their repayment tenure can extend up to 20 years. Once you close your personal loan, your monthly EMI expenditure will decrease, and you can focus completely on repaying the home loan.

Another important factor to consider is that, unlike personal loans, home loans allow you to avail tax benefits. It’s possible to avail a deduction of up to Rs 1.5 lakh towards principal repayment and up to Rs. 2 lakh on the interest repayment. These tax benefits can be availed for the entire home loan tenure and can make your loan repayment affordable.

Prioritize Your Loan Repayments
By prioritizing your loan repayments, you will be able to close all your debts systematically. This will also help you save a large sum in the long run. Follow the below-mentioned tips while repaying your loans:

Try to repay your costliest loan first. Loans that have higher interest rate associated with them should be repaid at the earliest
Calculate the overall cost of borrowing of the loans and make your repayment strategy accordingly
Find out the total interest pay-out of the loan. By reducing the tenure of the loan, you will be able to save on the interest outgo

To sum it up, you must pay off the costliest loan first to reduce your repayment burden. Apart from interest rates, you should also check various other parameters such as the total borrowing cost, tax benefits, prepayment charges, etc., while planning your repayment strategy. You should use an online EMI calculator and analyse each of your loans separately to make a well-informed decision.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

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