NEW DELHI: Many consider home loans a burden and seek to get rid of it as soon as possible by planning for a pre-payment, but is this the right thing to do? Experts point out that while being debt-free is very wise, one should never ignore their other financial needs while trying to prepay loans quickly.
“People have to be very mindful while trying to prepay loans quickly. Different aspects of financial life, such as funds needed for emergencies, health expenditures, and children’s education, should be taken into consideration before deciding to prepay your loans,” said Sanjay Kumar, a wealth advisor.
According to experts, one should not make the mistake of using funds set aside for emergencies to prepay home loans, since one never knows when an emergency will strike. Many people compromise on their day-to-day needs and savings while trying to get rid of their home loans fast, they add, pointing out that it was not the best move. “Plan your financial needs first and the surplus amount can be used to prepay your loan every month,” noted Kumar.
Financial planners also point out that there is another viable option where instead of using an availble surplus to pre-pay the loan, a borrower may put it into other assets such as equities. Reasonable returns would offer the chance of using the proceeds to prepay the amount in a lump sum.
For those who have decided to prepay a loan, experts advise that one first needs to calculate the opportunity cost. This is the benefit forgone by not investing the same sum that you are planning to prepay in an available asset class. In case the opportunity cost is lower than the money saved through interest, it would make sense to only make a part prepayment of the home loan. One should weigh all options and, if required, should not hesitate to seek an expert’s advice before choosing the best way forward, they add.