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Tata Capital > Blog > Should You Pay Off Your Personal Loan or Increase Your Saving? Which is Better in the Long Term?

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Should You Pay Off Your Personal Loan or Increase Your Saving? Which is Better in the Long Term?

Should You Pay Off Your Personal Loan or Increase Your Saving? Which is Better in the Long Term?

Should you save for uncertainty, or should you pay off your personal loan? You must do both, but there’s a way to prioritise. Completely letting go of saving or defaulting on loan repayments can land you in trouble.

The general rule of thumb to follow is to put at least some money in an emergency fund and use the rest to pay off your loan. Even if you have to let go of investing for some time, that’s fine. But, ensure that your emergency corpus is not empty.

If you’re contemplating how to both save and pay off your personal borrowing or loan, read on for tips.

Paying off loan vs saving

Here are the three questions you must ask yourself before chalking out a loan repayment and simultaneous savings strategy.

Additional Read – How to Apply for a Personal Loan Top Up?

How much do I already have in my emergency account?

If you already have a substantial emergency corpus, you can skip depositing large amounts in other savings instruments and prepay your loan quickly. Although, before opting for personal finance, check what a lending institution’s prepayment charges are. Choose a lender with low prepayment charges.

Wondering how much is enough for your emergency corpus? Experts recommend that your emergency account must contain at least three months’ worth of living expenses. So, if you already have that much, you can prioritise repaying your loan.

Am I expecting a side income or sudden gain from other sources?

If you’re about to receive money from any investment vehicle like PF or PPF or are waiting for rental income, then don’t stop saving or investing. Use partial or full proceeds from these alternate sources to pay off your loan.

We understand it’s tempting to use this extra money for big-ticket purchases, but hold off on those, if possible. Know that when you quickly pay off your loan, you reduce your total personal loan interest rate.

What are my prospects at work?

Do you feel insecure at your current job? Are you in the middle of switching jobs and your city? If there is any work-related uncertainty coming your way, prioritise emergency savings. The logic is that if you end up without work, even for some time, you have the funds to sustain your lifestyle for at least the next three months. Once you’ve topped up your emergency fund, prioritise paying your loan.

Only after critically evaluating these three factors, you’ll have a clearer picture of how to divide your funds between savings and paying off your loan.

Additional Read – Tips to Improve Personal Loan Application

Before you go

Are you looking for personal finance at affordable interest rates? Well, then consider one of India’s most trusted lending institutions – Tata Capital. With our relaxed personal loan eligibility criteria and speedy processing, you’ll end up covering any pending expenses without hassles.

Before applying, you can also check the kind of monthly instalments you’d be expected to pay by using the personal loan EMI calculator available on our website.

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