If you are servicing a loan, whether it is a home loan, a personal loan, an education loan, a gold loan, or a credit card loan, getting rid of the outstanding amount should be your top priority. Remember that any return on your investments, including equity funds or deposits, will be offset to the extent that you are paying interest on any loan. With no debt, you can start earning money from your investors right away, which will help you build wealth in the long run. Avoid relying too heavily on loans and devise a strategy for meeting your objectives while making the most of your income.
You need to abide by three rules if you wish to pay off your loans early:
- It would keep the interest burden diminutive
- It will assist in getting cleared off of debt effectively
- It would help in producing an asset by availing a loan
Before you begin repaying loans (gold loan, home loan, personal loan, etc), make sure you have a sufficient investible surplus to meet your long-term objectives. If funds are designated for children’s education, marriage, or retirement, they should not be redirected to loan repayment unless necessary.
Begin repaying the loans with the highest interest rates. Credit card debt has a high annual interest rate of around 42% and should be paid off first. Stop making new credit card purchases until you have paid off all outstanding balances.
Next, consider personal loans, but before repaying, consider any prepayment penalties. All consumer loans obtained when purchasing white goods such as washing machines or even smartphones are personal loans. Calculate the interest charges you’ll save by repaying against the prepayment penalties and processing fee you’d have paid otherwise. Make a plan to repay your loans as soon as possible if you have more than one. The almost finished loan may be continued, while the bank/lender may terminate the new loan sooner. Similarly, car loans, gold loans, and loans against FDs must be paid off when you have a surplus after deducting prepayment penalties.
Your home loan can be the last port of call, and you should focus on repaying it only after you have paid off all of your other debts, such as personal loans and credit card balances. A home loan is the only constructive loan because it contributes to creating an asset with the potential to appreciate. In addition, paying off an education loan can be done later because both a home loan and an education loan have tax advantages that you can take advantage of.