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Which Loan Should I Pay Off First?

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Highlights

  • Want to know which loan should you pay off first if you are handling multiple loans?
  • Look to pay off the loan that has a high interest cost - Read this post for details

If you’re asking this question, you must be handling multiple loan payments and may even have a credit card. In case you are paying all of them on time, there’s no need to worry. Otherwise, you have some serious rethinking to do! Not only does the non-payment of loans reduce your credit score and make you ineligible for fresh credits in the future, but it can also lead to complications if it is about the non-payment of unsecured credits such as personal loans and credit cards. In this post, we will suggest some plausible solutions to this critical problem. Let’s read further to know the same.

How to Decide the Loan That You Should Pay Off First?

Our opinion is that you should pay all your credits on time, doesn’t matter whether they are unsecured or secured. An unsecured credit will have a greater rate of interest and put ourselves under the debt trap if not controlled on time. Whereas, the non-payment of secured loans such as a home loan for long will mean the loss of an asset. We don’t think any of these will be acceptable to you. So, how will you go about it? Well, your priority should be to pay off high cost loans.

Credit Card Bills Should be Cleared with Immediate Effect

Unpaid credit card bills, if have gone out of control, can be a matter of concern for you. The reason being the excruciatingly high interest rate of 2.5-3.5% per month, accumulating to 30-45% a year, on unpaid credit card balances. You can thus clear this off with a personal loan, which can be availed at a lower interest rate of 10-20% per annum, and pay it diligently. If not a loan, you can convert your credit card bills into Equated Monthly Installments (EMIs) by asking the bank to do so. The EMI conversion comes at an interest rate of 13-18% per annum, quite lower than 30-45% otherwise. However, the credit card company may not convert the entire bill into EMIs. It may convert only the last 45-60 day transactions into EMIs. See which option suits you and choose it ASAP. Whatever you choose, one thing is certain – put a stop to fresh credit card purchases till the time your overall debt burden is reduced to the minimum extent and you have the required income to support such spending.

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Assuming You Decide to Pay Off Your Credit Card Debt with a Personal Loan, How Will You Go on from Here?

In this case, you may have two personal loans if you are already servicing one. So, the tenure for a new personal loan will be of utmost importance. Yes, you can get a personal loan for upto 5 years, but servicing the loan for that long may not be feasible. Think of reducing the tenure smartly so that you can make loan payments easily and keep both the EMI and interest payments in check. An example below will help you understand the matter better.

Example – You pay off the revolving credit card bill amounting to INR 1 lakh with a personal loan at 17% per annum. Now, instead of five years, you can take this loan for three years. How much difference will it bring to your overall outgo? Check out the table below for the same.

TenureEMIInterest Outgo
3 YearsINR 3,565INR 28,350
5 YearsINR 2,485INR 49,115

See you are saving more than INR 20,000 by choosing a shorter tenure of 3 years. But since there are two personal loans, you need to be particular about your overall expenses. Cut down on your unnecessary expenses and ensure both the loan payments on time. Assuming your other personal loan EMI amounts to INR 15,000, you need to spend in a way that can help save you at least 10%-15% of your monthly income.

How Should You Manage Home Loan Payments?

Home loan obligations are much higher than other loans even though the former comes with a lower rate of interest compared to the latter. The reason is obvious in light of the massive loan amount that you will need to buy a home. In case you have been servicing home loan EMIs for long but feel that the interest rate is higher than what’s prevailing in the market, think of doing a home loan balance transfer. Even if the existing home loan interest rate is higher than the average rate by more than 0.25-0.50% and the loan has quite a lot of years left, go for the balance transfer. But look for the maximum difference in the interest rate to reap maximum gains.

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Example – You have borrowed a home loan of 50 lakh at 8.30% per annum 5 years back for 20 years. Given the current scenario, you can get a balance transfer at 7.50%. Let’s see how much it will save you in the table below.

Home Loan AspectsAmount
Loan AmountINR 50,00,000
EMI Payable @8.30%INR 42,760
Interest Payable @8.30% for 20 YearsINR 52,62,480
Interest Paid Till 5 YearsINR 19,60,078
Outstanding Balance at the End of 5 YearsINR 43,94,458
EMI Payable Post Balance TransferINR 40,737
Interest Payable @7.50% Post Balance TransferINR 29,38,232
Interest Paid @8.30% Till 5 Years + Interest Payable @7.50% Post Balance TransferINR 48,98,310
Savings in Terms of EMIINR 2,023 (42,760-40,737)
Savings in Terms of Interest OutgoINR 3,64,170 (52,62,480-48,98,310)

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Personal Loan Interest Rates November 2020
Fullerton India14.00% - 24.00%
HDFC Bank10.75% - 21.45%
ICICI Bank10.75% - 17.50%
IndusInd Bank11.00% - 23.00%
Kotak Bank10.99% - 20.99%
RBL17.50% - 26.00%
Standard Chartered Bank11.00% - 15.00%
Tata Capital10.99% - 19.75%
Home Loan Interest Rates November 2020
Axis Bank7.75% - 8.55%
Bank of Baroda6.85% - 8.25%
Citibank7.13% - 8.03%
HDFC6.90% - 7.65%
ICICI Bank6.90% - 8.05%
Indiabulls Housing Finance Limited8.99%
Kotak Bank6.75% - 8.45%
LIC Housing6.90% - 7.90%
Piramal Capital & Housing Finance9.65%
PNB Housing Finance7.50% - 9.20%
Reliance Home Finance8.75% - 14.00%
State Bank of India/SBI6.95% - 7.60%
Tata Capital7.50% - 8.75%