Additional Cash — Should I pay back my home loan or personal loan?

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 –

Inter­est rate is more for a per­sonal loan as against home loan inter­est rate

There is an appre­ci­at­ing asset in case of home loan whereas per­sonal loan has a dead expense.

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1 Response

  1. I agree that Tina should pay off her personal loan first before home loan. Depending on the current interest rate the lender is having, it is best to pay off personal loan. Thank you for sharing this blog.