Which loan should you repay first- Home loan or personal loan?

If you have surplus funds, it is always wise to repay an existing loan or at least a part of it. In today’s age, an existing home, personal, and car loans are common in everyone’s list of liabilities. When you wish to use a surplus on loan repayment, you must choose between the existing loans. Instead of splurging on luxuries, you can use a personal loan EMI calculator to check if you can reduce the pressure on your monthly budget.

When it comes to picking between a home loan and a personal loan, here are the things you should consider before repaying either.

Home loan

You have to compare the rates of interest in both cases. Generally, personal loan interest rates are higher than a home loan, as secured loans like home loans charge a lower interest rate. When you pay off the principal amount of your loan, the outstanding amount is reduced. The interest on the reduced outstanding balance will accordingly decrease, thus resulting in cost savings for you. You can check a home loan and personal loan EMI calculator to determine the cost of borrowing for each loan.

  • Foreclosure charges

Prepayment of a personal loan is generally discouraged by lenders. Many lenders don’t allow foreclosure in the first six months and impose a high foreclosure fee afterward. Home loans with fixed interest rates may have prepayment penalties, but floating-interest home loans generally have zero foreclosure charges. You have to compare the cost and tax savings of a home loan with the foreclosure charges of a personal loan to decide which one to repay first.

  • Tax benefits

A personal loan doesn’t offer any tax benefit on your annual income tax. On the other hand, a home loan liability provides tax benefits under sections 24, 80C, and 80EEA. You save tax on the home loan’s interest and principal portion. From that perspective, you might want to continue the home loan, earn these benefits, and get rid of the personal loan first.

  • Other benefits from the loan

Apart from these factors, your personal preference may also influence your decision. You may be expecting other benefits from your home and personal loans. For example, you may have opted for an overdraft facility or plan to apply for a top-up on your home loan. You may also plan to transfer your loan balance to a particularly cost-effective lender. Generally, modern home loans offer more additional benefits than personal loans, which may be crucial for picking which one to repay first.

While personal loan interest rates are an important consideration, other factors and personal preferences are at play when deciding which loan to repay first. Therefore, you should evaluate each important consideration and decide which one to pay first – a home or personal loan.

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