Prepayment: How to make the best use of your excess money


In an age when fixed income products offer lower returns and stock markets remain foamy, individuals should use their excess cash to prepay long-term debt such as outstanding credit cards, debts and loans. personal, auto and real estate loans.

Experts suggest that if an individual can generate after-tax returns higher than the current interest rate on a home loan, then they should invest in the excess money. They suggest that stock valuations are stretched and returns can be mixed and investors who start investing in stocks now shouldn’t expect much higher returns. Before prepaying loans that contribute to long-term asset building, a person should secure sufficient emergency funds to cover expenses for one year and adequate life and health insurance coverage. If this is not done, in an emergency the person may need to take out a personal loan, which attracts a much higher rate than a home loan.

However, in the case of a car loan, it is ideal to repay with additional money as a car loan would be at a higher interest rate than the home loan without any tax benefits and, finally, a car. is definitely a depreciating asset. whereas in general a house is an asset that appreciates.

Prepaid real estate loan
As equity investments have yielded higher returns, one can record profits and prepay part of the mortgage. Experts say the ideal strategy in this bull market is to stay invested with occasional reservations of partial profits and shift some profits to fixed income or prepay loans with higher interest rates. As interest rates on home loans have fallen over the past two years, prepaying is ideal as a rise in interest rates will place an additional burden on the borrower.

Experts suggest that if individuals are unable to make a lump sum payment, they can opt for a systematic withdrawal plan from their mutual fund investments and use the monthly proceeds to increase the EMI. The EMI increase can be requested at any time and there is no charge for such a request. Additionally, for an employee, the increase in EMI helps as the borrower progresses in their career and higher compensation packages that will result in higher disposable income.

In a home loan, the interest portion is prepaid. Thus, a borrower must start prepaying a certain amount in the first year of the loan. Paying early later does not save much in terms of interest payments. Banks do not charge any prepayment penalties on floating loans and banks will accept prepayment if it is made from their own funds and as proof they will ask for a six month bank statement.

Before repaying a mortgage loan early, it is necessary to evaluate the tax advantages of the mortgage loan. The Income Tax Law provides for a tax deduction of interest in the case of self-employed up to Rs 2 lakh and up to Rs 1.5 lakh on the repayment of principal under Article 80C.

Clear credit card contributions
Any excess money should be used to pay credit card dues. Rolling credit by paying the minimum amount owed is not a good idea as banks charge an interest rate of between 35% and 45% per annum, depending on spending, amortization, and banking habits. use. In fact, rolling credit is much more expensive than even a personal loan, which can be used at 13-15% per annum.

If you have more than one credit card, you must first pay the premiums on the card that charges the highest interest rate. This will reduce the individual’s interest expense, as unpaid contributions on cards with a higher interest rate will accumulate more interest. So, once the credit card bill with the highest interest rate is paid off the excess money, it must then switch to the card with the least outstanding balance.

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