Should I Pay off a Personal Loan First or a Home Loan?

Loans can be a blessing when you manage to stay on top of your payments. Loans are an essential aspect of everyday living since they manage to enhance our purchasing power, but an over-dependence on them can cause debt and troubled financial life.

When taking a loan, ensure that you repay the debt as soon as possible. This is not to say that you cannot take an additional loan when you already have an existing one. It is all a matter of priority. Which loan do you want to pay first and which you can afford to pay later? When it comes to choosing between a Personal Loan and Home Loan, which one should you repay first?

The Kind of Tax Benefits Offered

Personal Loans do not come with income tax benefits. In contrast to this, Home Loans offer you a deduction of around 1.5 to 2 Lakhs every year. Owing to this, repaying your Personal Loan does not alter your income tax planning while complete or even partial Home Loan repayment can change your tax planning for many years.

The Cost of the Entire Loan

Generally, wanting to do away with the largest loan first is everyone’s first choice although there are some others who prefer paying off the small loan first. In the world of finance, rather than the size of the outstanding loan, greater importance is given to the interest rate or cost payable on the loan.

Paying off the high-cost loan first is advisable. Home Loans are comparatively cheaper than Personal Loans, so paying off the Personal Loan first makes more sense. This holds true unless in the case of employer-provided subsidised Personal Loans that come with a lower interest rate than a Home Loan.

Penalties Involved in Pre-payment

Prepaying a loan comes with its own set of penalties, and if it is a Personal Loan that comes in the 3-4% range, the penalty is even more piercing. In fact, there are a few Personal Loan lenders who don’t offer the pre-repayment option during the initial six months of the loan tenure.

After the six months gap too, pre-payment penalties are high. When it comes to Home Loans, floating rate Home Loans do not consist of pre-payment penalties. However, fixed-rate Home Loans may include pre-payment charges.

Ancillary Benefits

A majority of Home Loans, especially the immensely popular and huge ones, comes with ancillary benefits. These benefits usually refer to overdraft facilities and top-up loans. Gone are the days of daunting and wicked Home Loans. Today, with the advantage of additional benefits and even a current account facility, you can seamlessly save on interest and maintain your surplus funds. This acts as a boon, especially for self-employed individuals. Personal Loans, on the other hand, do not come with any of these advantages.

Your Credit Score

A few experts feel that the existence of a Home Loan (which is a secured loan) proves beneficial when building a credit score. Home Loans play a role in creating a long-term credit history. They are a great way to build your credit score. In short, paying off a Personal Loan proves to be more beneficial for you.

Personal Loan vs. Home Loan

While a Home Loan is self-explanatory, in a sense, you go in for a Home Loan when you wish to buy property and can’t afford to pay for the high housing costs, a Personal Loan Offer assists in paying for smaller aspirations such as vacations or marriage. Personal Loans and Home Loans come with their own set of characteristics. It is essential to distinguish between these two loans when determining which to pay off first.

Considering the facts mentioned above, it is more advantageous to pay off a Personal Loan first before going ahead and paying a Home Loan. If you have more queries or doubts, consult our finance experts at MyMoneyMantra.

Also Read: 5 Tips for a Happy Borrowing Experience

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