Individuals should utilize their surplus money to prepay long-term debts such as credit card balances, personal, vehicle, and mortgage loans at a time when fixed income products are yielding lower yields and stock markets are still exuberant.
Experts advise that if a person can earn a better post-tax return than the current interest rate on a home loan. In this case, he should invest the extra cash. They claim that equity the valuations inequities are stretched and the returns may be muted. Furthermore, investors who begin investing in equities now should not expect substantially higher returns. Before prepaying loans that will help you grow an asset in the long run. Be sure you have enough emergency money to cover a year’s worth of expenses, as well as enough life and health insurance. Otherwise, if the person faces any financial instability it might push them for a personal loan; which has a significantly higher interest rate than a home loan.
However, it is preferable to pay off a vehicle loan with extra cash because a car loan has a higher rate of interest than a home loan. It has no income tax benefits, and, finally, a car is a depreciating asset. Whereas a house is normally an appreciating asset.
Prepay home loan
In cases where equity investments have produced higher returns, earnings can be booked and a portion of the home loan can be prepaid. According to experts, the best strategy in this bull market is to stay invested while taking partial profit bookings. As well as transferring some earnings to fixed income or prepaying higher-interest loans. Prepaying a house loan is perfect now that interest rates have fallen in the last two years; as a jump in the interest rate will burden the borrower even more.
If a person is unable to make a lump-sum payment, experts advise that they take a systematic withdrawal plan from their mutual fund assets. Then the user shall use the surplus monthly income to increase the EMI. Users can request an increase in their ongoing EMI, at any time; it is generally free of any fees. Stepping up the EMI for a salaried employee also helps as the borrower advances in his profession. Furthermore, they receive better pay packages, resulting in more disposable cash.
Clear credit card dues
Any surplus money must be utilized to pay off credit card dues. Rolling the credit by paying the minimum amount due is not a good idea; as banks charge an interest rate between 35% and 45% per annum depending on one’s spend, payback, and utilization patterns. In fact, rolling credit is a lot more expensive than even a personal loan, which can be availed at 13-15% per annum. For more such updates, keep watching this space!