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Tata Capital > Blog > Loan for Home > Home Loan Vs Personal Loan? Which One Should You Repay First?

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Home Loan Vs Personal Loan? Which One Should You Repay First?

Home Loan Vs Personal Loan? Which One Should You Repay First?

Loans can work as a blessing in our times of need. Loans such as a home loan can not only finance your home but also increase your purchasing power to buy a better one. However, loan repayment can turn out to be a stressful aspect if you don’t take care of finances effectively.

Daily expenses contribute to this greatly. While they might not seem significant individually, the month-end bills can add up to substantial expenses. Things get more pressing when you have additional responsibilities as well. Moreover, some people may take another loan while in the midst of repaying another one. Although there is nothing wrong with taking two loans, you must consider their affordability, your income, and expenditure to ensure you can repay them conveniently.

Are you repaying a home and personal loan simultaneously? 

Then, keep reading to learn about how to prioritise your home loan vs personal loan repayment commitments.

Difference Between Home Loan and Personal Loan in India

When comparing personal loan vs home loan, the most noticeable distinction lies in the purpose and security of the loan. A home loan is a secured loan, typically used for purchasing or constructing property, where the property itself acts as collateral. In contrast, a personal loan is unsecured and can be availed for multiple purposes, from medical emergencies to travel, without pledging any asset.

Interest rates also differ significantly when considering home loan or personal loan options. Home loans generally have lower interest rates due to their secured nature, making them more cost-effective over the long term when considering personal loan vs home loan. Personal loans, being unsecured, carry higher interest rates and shorter tenures, leading to higher monthly repayments.

Another important factor is the loan tenure. Home loans offer longer repayment periods, sometimes up to 20–30 years, while personal loans typically need to be repaid within 1–6 years. Evaluating these differences carefully is crucial when deciding whether to prioritise your home loan or personal loan, ensuring better financial planning. In the personal loan vs home loan debate, understanding these distinctions can guide you toward a repayment strategy that minimises stress and maximises savings.

Factors determining the urgency of repayment

Often, when people have more than one loan, they continue to repay them equally by allocating a steady supply of their income towards EMIs. However, this can harm your savings in the long run. Also, with a home loan already on your shoulders, making a personal loan repayment can make things complicated. 

Here are some things to consider when deciding on your home loan vs personal loan EMI payments:

  • Total EMI amount
  • Is the interest rate higher than the personal loan rate?
  • Loan tenure

In any case, you can always use a home loan EMI calculator to accurately determine the EMI burden of the two loans. And choose which one to repay first.

Personal Loan or Home Loan: Which Should Be Repaid First?

Since both loans are important to repay, a simpler way of deciding would be to use tools like a personal loan repayment calculator. This will help you find out how much you are spending right now. By plugging in the numbers for interest rates, the loan amount, and the number of years, you’ll get a monthly EMI figure.

You can also decide which loan to repay first by considering the factors given below.

Interest rates

Because of higher interest rates, personal loan repayment can be prioritised over home loans. Furthermore, as home loans give you tax benefits on both the principal as well as the interest, it is wise to repay your personal loan first.

Tax benefits

As opposed to personal loans, a loan for a house purchase comes with tax benefits. You can claim up to Rs. 2 lakhs paid on the interest for the entire loan tenure. This can significantly reduce your tax burden and help you save money, making the loan repayment relatively affordable.

Cost of loan

Generally, people prefer to pay off the loan with a high value of borrowing. But it is more beneficial to repay the high-cost loan first. This means you should repay the loan with a higher interest and longer tenure first and get free from the burden. After that, you can easily manage to repay the loan with a more affordable home loan interest rate.

Prepayment facility

There’s also the option of prepaying a loan. You can choose to prepay a loan and close it earlier, but this comes at a cost. You need to pay the penalty on prepayment, so make the decision wisely. Some lenders do not provide a prepayment facility at all. Thus, you should clarify whether this facility is available or not beforehand.

Generally, lenders have specific rules about the time of repayment. For instance, lenders may let you prepay the loan after a year of paying the monthly installments. They can also decide how much you can pay. For instance, you may be allowed to pay 25% of the principal amount that is outstanding. So, with a personal loan repayment calculator, you’ll be able to calculate how much you need to pay and how much you can save after the prepayment too.

Experts generally advise prepaying the home loan first as it offers a large benefit. The benefit here is that a large chunk of your prepayment money will go towards the interest. Since the first few years generally have you paying the bulk of interest, prepaying a large amount will mean you will pay more toward the principal and less toward the interest in the future. In other words, you’ll be paying the loan much faster this way.

Effects on Credit Score: Personal Loan vs Home Loan

Understanding the difference between home loan and personal loan is crucial when managing your credit score. Home loans usually have a longer tenure and lower interest rates, making timely EMIs easier to maintain, which positively impacts your credit score. 

Personal loans, with higher interest rates and shorter tenures, can strain finances if not managed carefully. Therefore, when deciding between home loan or personal loan which is better to repay first, timely repayment of high-interest personal loans often makes sense to avoid negative credit impacts. Evaluating personal loan or home loan which is better depends on your repayment capacity and long-term financial planning.

Conclusion

And that’s it! You now have a complete picture of the repayment of two loans at once. If you want to finance your house purchase, leverage Tata Capital’s easy-to-fulfill home loan eligibility and obtain a loan of up to Rs. 5 crores.In addition, we provide a flexible tenure of up to 30 years, depending on your convenience, and some of the most competitive interest rates. For more information, visit our website today!

You can also explore the personal loan apps offered by Tata Capital for quick and easy access to funds.

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FAQs

What is the main difference between a personal loan and a home loan in India?

 

The key difference in personal loan vs home loan lies in purpose, tenure, and interest rates. Home loans are long-term, lower-interest loans for purchasing property, while personal loans are short-term, higher-interest loans for general needs. Choosing home loan or personal loan depends on your financial requirement and repayment capacity.

Which loan should I pay off first: personal loan or home loan?

 

When considering personal loan vs home loan, high-interest personal loans are generally advisable to clear first. Evaluating home loan or personal loan priorities depends on interest rates, tenure, and financial goals. Personal loan or home loan which is better to repay first ultimately hinges on reducing interest burden while maintaining credit health.

How do tax benefits differ between home loans and personal loans?

 

Home loans offer tax benefits under sections like 80C and 24, allowing deductions on principal repayment and interest. Personal loans, however, allow tax deductions only in certain cases. These include taking a personal loan for purchase, construction or home improvement and business investment.

Is prepaying a personal loan better than a home loan in India?

 

Prepaying a personal loan in India is often more beneficial due to higher interest rates compared to home loans. Understanding the difference between home loan and personal loan helps in prioritising repayments, as clearing high-interest personal loans first can reduce overall financial burden and improve credit health.

What impact do personal and home loans have on my credit score?

 

Both personal and home loans affect your credit score through timely repayments and outstanding balances. Regularly paying EMIs on time for either loan type helps improve your credit score. Choosing personal loan or home loan which is better to repay first can also influence your creditworthiness.

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