DT Personal Finance: Simultaneously managing, prepaying multiple loans

CHENNAI: While being free of loans is a desired state for most, the reality is that quite often, one does need to take loans. Not just for large purchases like a house or a car, but at times also for smaller unplanned expenses. So, if you have more than a couple of loans, and you want to get rid of them quickly, then how should you go about it?

Let’s take an example. Suppose your monthly income is Rs 1.25 lakh and your spouse’s income is Rs 1 lakh. Your regular household expenses are about Rs 75,000 per month. Over the years, one thing led to another, and now you have quite a few loans:

• Home loan of Rs 75 lakh for 25 years at 8.5% with a EMI of Rs 60,392

• Car loan of Rs 12 lakh for 4 years at 10% with a EMI of Rs 30,435

• Personal loan of Rs 5 lakh for 3 years at 12% with a EMI of Rs 16,607

• Credit card dues Rs 1 lakh @ 3.3% per month (Or 39% annually)

As of now, you are paying a total EMI of close to Rs 1.08 lakh for home, car, and personal loans.

So, after considering the family’s monthly income of Rs 2.25 lakh, household expenses of Rs 75,000, and EMIs of Rs 1.08 lakh, there is still a surplus of about Rs 42,000 per month.

This is assuming that there are no savings being made (let’s discuss this aspect a bit later). Assuming you want to prepay your loans, how to use this Rs 42,000 monthly surplus? And if all of it has to go towards loan prepayment, then which loans should be tackled first?

The answer is to prepay the loan which has the higher interest rate first. In this example, the credit card cost more than 39% annually. So, this is what needs to be tackled first. Given Rs 42,000 monthly surplus, you can easily clear off the car dues in about 3 months’ time. Once the credit card dues are cleared, go towards a personal loan that costs 12%. After that, it should be your car loan at 10%. Once that is done, prepay your home loan as well. By that time, your monthly surplus would have also increased due to income hikes.

Coming back to the idea of using the full surplus to just repay loans. Is this appropriate? There are different views on this. Assuming you have some money set aside as emergency funds, you should first try to clear your credit card dues and personal loan in full. Once that is done, a home loan can still continue regularly as these cost less on a post-tax basis. That way, you can start saving/investing your money as well parallelly instead of waiting to become loan-free and then starting.

While loans allow you to prepone your purchases, they also come at a cost. So ideally, you should not have too many loans running simultaneously. And best to use your high-interest credit card judiciously. Only spend the amount from it which you can fully clear off before the next due date. If not, better save the money and then spend it after a month or two.