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Tata Capital > Blog > Personal Use Loan > Pre-Payment of Personal or Top-Up Loans. Does it Make Sense?

Personal Use Loan

Pre-Payment of Personal or Top-Up Loans. Does it Make Sense?

Pre-Payment of Personal or Top-Up Loans. Does it Make Sense?

Do you have a personal loan or a top-up loan? If the answer is yes, then chances are high that you would want to clear it as soon as possible. Isn’t it? After all, without even getting into the mathematics of it, most people prefer not having loans than to have one.

So lets say that you currently have the ability to prepay a part or full outstanding amount of your personal or top-up loan. Will you do it then?

Lets try to arrive at the right answer here.

Suppose you had taken a personal loan @16% of Rs 5 lac two years ago. Now after having repaid for last two years, you current outstanding is Rs 3 lac. You have also taken a top-up loan of Rs 1.5 lac (@15.5%). So your total outstanding is about Rs 4.5 lac.

Now what will you do if you happen to receive Rs 3 lac from maturity of your insurance policies?

You have 3 options:

1.    Spend it on things you like

2.    Save it as FD in banks or invest elsewhere

3.    Repay your personal loan

Since the first choice is a personal one, there is not much to discuss about it. The choice between the second and the third option is to be made after doing some calculations.

Ideally, if you have money that can be used to repay a loan or can be invested, it should be used for investment only if the expected returns are more than what you are paying as interest on loan.

So if your loans are charging you about 16%, then you need to find an investment option that pays you more than that. Unfortunately, there are no such options that can guarantee you that kind of returns. Bank FDs or government-backed instruments can at most pay you 9%. Investing in stocks can be an option but its not guaranteed.

Since there are no reliable or guaranteed investment option available, it seems wiser to pay off as much of your personal or top-up loan as possible. This way, atleast you will save a lot of money on interest costs.