From the last 1 year the market has given 0% returns, whereas if you prepay the loan your 8% would have saved if your loan interest rate is 8%. This is thr question been asked by many. But they are forgetting a simple Funda, that the loan runs for long term say 15 to 20 years whereas the bear market is for less time maybe 2 to 3 years.
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When the bull market returns, we will see Nifty giving 12% returns very easily. Now think about is 8% better or 12%. 12% returns is better because then your money will grow at a good rate than the loan amount. For example, if you have 10 Lakh spare and you want to prepay so you will save 80K in that whereas if you invest you will easily get 120K. Basically you are earning 40k more without doing anything.
I know clearing debt should be the priority. But if you have the money then debt should not be a problem. For example, if your debt is 30 lakhs and you have 30 Lakhs save. Then the debt shouldn't bother you. You can clear the debt at any point of time. The question is what is your interest rate of debt, if it's less than the returns you are getting, then investing rather than prepaying is a better option.
When I had a loan, I used to prepay it but I have learnt my lesson. My loan amount was 9%, but at the same time the returns on Sensex was around 13.5%. So that means I lost around 4.5% returns over the year and thus for me prepaying the loan was a bad option. Yeah I closed the loan but still I could have saved a good amount of money in that.
Posted Using INLEO
