Loans can work as a blessing in our times of need. Loans such as a home loan can not only finance your home but also increase your purchasing power to buy a better one. However, loan repayment can turn out to be a stressful aspect if you don’t take care of finances effectively.
Daily expenses contribute to this greatly. While they might not seem significant individually, the month-end bills can add up to substantial expenses. Things get more pressing when you have additional responsibilities as well. Moreover, some people may take another loan while in the midst of repaying another one. Although there is nothing wrong with taking two loans, you must consider their affordability, your income, and expenditure to ensure you can repay them conveniently.
Are you repaying a home and personal loan simultaneously? Then, keep reading to learn about how to prioritise your home loan vs personal loan repayment commitments.
Factors determining the urgency of repayment
Often, when people have more than one loan, they continue to repay them equally by allocating a steady supply of their income towards EMIs. However, this can harm your savings in the long run. Also, with a home loan already on your shoulders, making a personal loan repayment can make things complicated.
Here are some things to consider when deciding on your home loan vs personal loan EMI payments:
- Total EMI amount
- Is the interest rate higher than the personal loan rate?
- Loan tenure
In any case, you can always use a home loan EMI calculator to accurately determine the EMI burden of the two loans. And choose which one to repay first.
Which loan should you repay first?
Since both loans are important to repay, a simpler way of deciding would be to use tools like a personal loan repayment calculator. This will help you find out how much you are spending right now. By plugging in the numbers for interest rates, the loan amount, and the number of years, you’ll get a monthly EMI figure.
You can also decide which loan to repay first by considering the factors given below.
Interest rates
Because of higher interest rates, personal loan repayment can be prioritised over home loans. Furthermore, as home loans give you tax benefits on both the principal as well as the interest, it is wise to repay your personal loan first.
Tax benefits
As opposed to personal loans, a loan for a house purchase comes with tax benefits. You can claim up to Rs. 2 lakhs paid on the interest for the entire loan tenure. This can significantly reduce your tax burden and help you save money, making the loan repayment relatively affordable.
Cost of loan
Generally, people prefer to pay off the loan with a high value of borrowing. But it is more beneficial to repay the high-cost loan first. This means you should repay the loan with a higher interest and longer tenure first and get free from the burden. After that, you can easily manage to repay the loan with a more affordable home loan interest rate.
Prepayment facility
There’s also the option of prepaying a loan. You can choose to prepay a loan and close it earlier, but this comes at a cost. You need to pay the penalty on prepayment, so make the decision wisely. Some lenders do not provide a prepayment facility at all. Thus, you should clarify whether this facility is available or not beforehand.
Generally, lenders have specific rules about the time of repayment. For instance, lenders may let you prepay the loan after a year of paying the monthly installments. They can also decide how much you can pay. For instance, you may be allowed to pay 25% of the principal amount that is outstanding. So, with a personal loan repayment calculator, you’ll be able to calculate how much you need to pay and how much you can save after the prepayment too.
Experts generally advise prepaying the home loan first as it offers a large benefit. The benefit here is that a large chunk of your prepayment money will go towards the interest. Since the first few years generally have you paying the bulk of interest, prepaying a large amount will mean you will pay more toward the principal and less toward the interest in the future. In other words, you’ll be paying the loan much faster this way.
Wrapping up
And that’s it! You now have a complete picture of the repayment of two loans at once. If you want to finance your house purchase, leverage Tata Capital’s easy-to-fulfill home loan eligibility and obtain a loan of up to Rs. 5 crores. In addition, we provide a flexible tenure of up to 30 years, depending on your convenience, and some of the most competitive interest rates. For more information, visit our website today!
07 June 2024
5 mins read
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