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Should I preclose Credit Card and Personal Loan and avail Home Loan

Planning on a Home Loan - I am paying around Rs. 27000 towards CCs and Personal Loans of around 6 lakhs take home of Rs. 45,000 recently got some liquid cash of Rs. 10,00,000. Should I close the current debt and proceed for Home loan? My CIBIL has been okay, but if I preclose will I get home loan, please advise?

May 10, 2016 by Radhika Dass, Vishakapatnam  |   Financial Planning

Against a take home salary of Rs. 45,000 you are paying Rs. 27,000 for credit cards and personal loan. That means 60% of your salary goes towards servicing the principal and interest of these two debts. By any standard, the debt % to your income ratio is very high, in fact alarming.

Yes, without any further delay, you should pay off / reduce the credit card and personal loans to the extent of liquid cash that you have got recently and if possible close both of these.

Your CIBIL score has been okay because, we presume, you are paying the personal loan and credit card EMIs in time. However, once you pre-close both of these, or even one, it will have a positive bearing on the Home Loan that you are planning to take and also enhance your CIBIL score!

There are other points why you should pre-close the existing loans and avail a home loan –

1. Interest rates are very high for personal loans and even higher for credit cards

2. You are not getting any tax benefit on these loans

3. Home loan interest rates are much lesser than that of the above loans. The current Home Loan interest rates vary between 9.40% to around 10.50% depending upon the quantum and period of the loan etc. you may try this calculator to know what your probable Home Loan EMI could be - https://www.advisorkhoj.com/tools-and-calculators/home-loan-emi-calculator

4. There are major tax benefits if you take a Home Loan. These are as follows -

  • Under Section 80C of the Income Tax Act, you get tax benefit on Home Loan (Principal Amount) upto Rs. 150,000 per annum provided the construction is complete and you have received the completion certificate. This tax deduction is the total of the deduction allowed under Section 80C which includes investment in PPF amount, ELSS mutual Funds, Insurance premiums, EPF contribution and NSC etc.

  • Under Section 24 of the Income Tax Act, payment of Interest upto Rs. 200,000 per annum is allowed in case of a self occupied property. However, if the property is not self occupied, no maximum limit is prescribed and the tax deduction can be availed on the whole interest amount under this section (subject to fulfilling certain conditions)

  • If you are a first time buyer of a house, you can additionally claim Rs. 50,000 for interest on home loan under Section 80EE. This is over and above of the tax rebate of Rs. 200,00 under section 80C for payment of interest. Please note that this is effective from Financial Year 2016-17 provided the property purchased is less than Rs. 50 Lacs and loan amount is less than Rs. 35 Lacs. Also, the loan sanction date should be between 1st April 2016 to 31st March 2017.

I think, with so many benefits of availing a Home Loan, it makes a compelling proposition to pre-close your existing personal loan and credit card EMIs and enjoy the tax benefit and also have additional liquidity.

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