I have taken a home loan of 20 lakhs. The current principal amount is 15 lakhs with an interest rate of 9.1% and 188 installments remaining. My EMI is 21,904. If I take a personal loan of 15 lakhs at an interest rate of 10.8% for a tenure of 60 months, my home loan will be closed earlier, helping me avoid paying more interest. Is this a good idea? Please suggest the best option.
Ans: You are already thinking smart about reducing your total interest.
Paying attention to the cost of debt is the first step towards financial control.
Your idea of closing the home loan early shows good intent, but the method matters.
» Understanding your current home loan status
– Current principal outstanding is Rs 15 lakhs.
– Interest rate is 9.1% which is moderately high for a home loan.
– EMI is Rs 21,904 with 188 months left.
– This means a long repayment period and high total interest cost.
» Evaluating your personal loan proposal
– Personal loan interest is 10.8%, which is higher than your home loan rate.
– Even with a shorter tenure of 60 months, interest rate difference is significant.
– A shorter tenure reduces total interest years but increases EMI size.
– Personal loans also have stricter repayment schedules without prepayment flexibility like home loans.
» Comparing costs and risks
– Home loan interest is usually cheaper than personal loans.
– Here, your personal loan rate is higher, so monthly interest cost will rise.
– You will pay interest at 10.8% instead of 9.1%.
– Even if tenure is shorter, higher rate offsets some savings.
– There can also be personal loan processing fees, adding cost.
» Understanding prepayment advantages in your current loan
– Home loans allow part prepayment directly reducing principal.
– Prepayment in early years saves the most interest.
– You can use surplus income or yearly bonuses for lump sum payments.
– This keeps your rate lower than personal loan and still reduces tenure.
» Refinancing instead of personal loan
– You can check if a home loan balance transfer to another lender is possible.
– If you get 8%–8.5%, it will reduce interest cost without changing to personal loan.
– Many banks offer lower rates for balance transfer with minimal charges.
» Liquidity and financial safety
– Taking a big personal loan ties up cash flow in high EMI for 5 years.
– If income drops or expenses rise, personal loan EMIs are harder to manage.
– Home loans often have flexible prepayment and longer tenure adjustment.
» Using surplus income wisely
– Instead of replacing home loan with personal loan, use surplus to prepay home loan.
– Even extra Rs 5,000–10,000 monthly can close your loan years earlier.
– This keeps you in a lower interest environment and avoids extra charges.
» Tax benefits from home loan
– Home loan interest gives you deduction under income tax.
– Personal loan for home repayment will not give same benefit unless conditions are met.
– Losing this tax advantage will increase your net cost further.
» Emotional and psychological factors
– A shorter personal loan tenure may feel better due to quicker closure.
– But financially, paying higher interest rate for emotional relief is not wise.
– Better approach is to attack your home loan aggressively with extra payments.
» Building a prepayment strategy
– Fix a monthly prepayment amount from your surplus income.
– Make at least one large extra payment each year.
– Redirect windfall income like incentives, gifts, and maturity proceeds to the loan.
– Review the outstanding every 6 months to stay motivated.
» Protecting other financial goals
– Do not stop long-term investments completely for loan closure.
– Maintain emergency fund equal to 6 months expenses before any large prepayment.
– Keep term insurance cover equal to or more than your loan amount for family safety.
» Why personal loan is not the right switch here
– Interest rate is higher than your current loan.
– Loss of home loan tax benefit increases net cost.
– Processing charges and foreclosure costs add burden.
– Reduced flexibility in repayment compared to home loan.
– Higher EMI pressure may reduce your financial comfort.
» Alternative smart steps
– Check with your bank for rate reduction with a conversion fee.
– Explore balance transfer to a bank offering lower home loan rate.
– Build a strong prepayment habit to shorten tenure and save interest.
– Keep investments alive alongside prepayment for wealth creation.
» Finally
– Your intention to reduce interest outgo is correct.
– But switching to a personal loan at 10.8% will increase cost, not reduce it.
– Focus on lowering your current home loan rate and prepaying from surplus.
– Maintain liquidity and protect long-term goals while clearing debt faster.
– This path keeps your interest burden lower and your financial stability intact.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
Question by ANURAG on Jun 18, 2010English
