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Tata Capital > Blog > Does Pre-Paying a Personal Loan Make Sense?

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Does Pre-Paying a Personal Loan Make Sense?

Does Pre-Paying a Personal Loan Make Sense?

Suppose that last year, you had taken a personal loan of Rs 2 lac for some personal reasons. Now luck has been very benevolent and you have made a cool profit of Rs 1 lac on trading some antique stuff you found in your ancestral house.

What is that you would want to do with this additional Rs 1 lac?

And we are not considering the option of splurging it on shopping, etc.

You already have a loan where your current outstanding is Rs 1.4 lacs. So does it make sense for you to prepay this loan or you are better off investing this money elsewhere?

The answer here should be driven more by mathematics and less by emotions.

Ideally, if you have surplus 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 on loan.

So if let’s say your current personal loan is charging you 15%, then you need to find an investment option that pays you more than that.
Savings account only gives you 4-6%. So that won’t do. Next are bank FDs that pay 5-7% after taxes. That won’t do either. Investing in stocks can be one option. But there is no guarantee that you will earn more than 15%. It’s quite possible that you might end up losing money as it often happens in stocks.

So with no good investment option available and if you don’t need the money for any other of your needs, it makes senses to pay off as much of your personal loan as possible. You will save a lot on your personal loan interest costs.

You may also chose to make a part payment of the personal loan and invest part of the remaining amount in some investment instrument. But before you take the plunge and prepay the loan, remember that some lenders have prepayment charges that should be considered too.

So don’t be in a hurry to deploy your new-found treasure. Take some time to think about it and then take a well-thought out decision.

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