Personal loan or Home loan — Which one to pay
Sounds weird. You must be wondering what kind of question is this. Why the comparison between home loan and personal loan? But this question was asked to me by one of my close friend. My Friend Tina had around Rs 2 lakhs savings and she has two loans – personal loan and home loan. She wanted to reduce her financial burden by paying off a certain portion of the loan. She was confused which loan to pay?
If you or any of your friend/relatives have come across similar issues, try to understand the type of loan, interest rate and the asset purchased/expense incurred from the loan. A personal loan is an unsecured loan and a home loan is a secured loan. Interest rate on a personal loan is much higher than a home loan. Find the purpose of taking the home loan and how the fund was utilized.
My friend Tina took the loan during her wedding. It was an expense and Tina is paying the monthly EMI for the expense incurred. However the underlying asset in a home loan is the home itself.
Personal Loan or Home loan – Which one to pay first?
My suggestion to Tina was pay off the personal loan and not the home loan based on the following reasons –
There is an appreciating asset in case of home loan whereas personal loan has a dead expense.