WE tip you off with smart strategies to help you manage your loans, better.

I took a house on loan and have been paying the EMIs, regularly. The balance amount is Rs 700,000. My yearly interest outgo is Rs 75,000 and I have six more years to end the loan tenure.

I have enough money now to pay off the pending loan amount. Should I pay off the loan amount or continue with the EMI payouts? Please advise.

-- Niraj Kumar, Bangalore

Harsh says: It's always better to prepay your loan if you have spare money. However, some circumstances may force you to think otherwise. A few tips to help you with this tricky decision.

Tip 1: Before prepaying, invest money so it can be liquidated easily for unforeseen contingencies. Once you prepay a loan, this money cannot be easily borrowed, later.

Tip 2: If you have any unsecured debt (credit card or personal loan), pay it off at once! No risk-free investment can ever give you a higher post tax return than the post tax cost of such a loan.

The difference is usually so high that even stiff prepayment penalties of around 3 to 5 per cent will not change the decision.

Tip 3: As a thumb rule (not applicable in all cases), it makes sense to prepay home loans as long as the prepayment charges do not exceed 2 per cent. Two exceptions to this thumb rule:

• Where interest rates on the home loan are lower than the current ruling rate (for example, if you entered into a fixed rate contract earlier).
  
  
• If principal repayment of the home loan, increases, the amount of deducted under Section 80C will also increase. This happens if you don't use the Rs 100,000 limit of deduction fully through other modes of investment such as life insurance premiums, contribution to provident funds, etc.
  
  

• We want to float
• Don't let your EMIs ruin your budget
  

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e-mail: Harsh Roongta

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