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Should I close my personal loan and increase home loan EMI

I have both home loan (21 lacs) and personal loan (6 lack). Also I have amount of 6 lakhs in bank account. Please advise me whether I should close my personal loan and increase my home loan EMI OR I should do pre-payment for home loan. Which option is beneficial for me?

Dec 12, 2015 by Amol, Pune  |   General

You should make a very rational decision based on how much interest you are paying. You have not mentioned your loan’s interest rates in your query. Going by the current rates, the interest rate for personal loans is 11 – 12%. The money in your savings bank account will probably earn around 4% interest, that too before taxes. Therefore, you should immediately pay off your personal loan, as much as you can, from your savings. This will result in considerable savings on the interest front for you. We are prioritizing personal loan payment versus home loan payment on the assumption that, your personal loan interest will be higher than home loan interest, which is usually the case most of the time. However, you should check interest rates of your loans and make an informed decision. Before paying off your loans, it is always prudent to ensure that you have sufficient balance in your savings bank account for emergency needs. Your emergency needs depend on your personal situation. Medical expenses are an example of emergency fund needs. But if you have sufficient health insurance or Mediclaim, either through your employer or individually, you do not need to have a big emergency fund for your medical expenses. There can be other emergency expenses depending on your personal situation; you should evaluate your personal finances, preferably in consultation with an experienced financial planner and decide accordingly. While being debt free is always a desirable outcome, you should not ignore your other long term financial goals and invest towards those goals in a disciplined way. For example, you can explore extending your home loan tenure, reducing your EMIs and investing towards your long term goals through SIPs in mutual funds.

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