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Ramalingam Kalirajan5092 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jun 04, 2024

Asked on - Jun 03, 2024Hindi

Sir...need a guidance. Had taken a loan from HFC of which 20L have been disbursed.... the project is not moving and I am struck with EMI. I have one FD maturing for 25L next month... would it be prudent to have the funds into the loan account and preclose the outstanding OR should I continue with EMI. which currently is around 15000 pm. it has run a tenure of 2 years .
Ans: Evaluating Your Current Financial Situation
You have a loan from a Housing Finance Company (HFC) with Rs. 20 lakhs disbursed.

The project is not moving, and you are stuck with EMIs.

Your EMI is around Rs. 15,000 per month, and you have paid for 2 years.

You also have a Fixed Deposit (FD) maturing for Rs. 25 lakhs next month.

Understanding Loan Prepayment Benefits
Prepaying your loan can save you interest over the long term.

By reducing your principal amount, you decrease the interest burden.

It provides peace of mind as you eliminate the debt.

Evaluating Loan Interest vs. FD Interest
Compare the interest rate on your loan with the interest rate on your FD.

If the loan interest rate is higher than FD returns, prepayment is wise.

This way, you save more money by reducing high-interest debt.

Calculating Potential Savings
Let's calculate the interest savings if you prepay your loan.

Assuming your loan interest rate is 8% per annum.

The total interest saved can be significant over the remaining tenure.

Considering EMI Continuation
Continuing with EMIs means retaining liquidity.

You can use the FD maturity amount for other financial needs.

Evaluate if this liquidity is necessary for your future plans.

Assessing Liquidity Needs
Consider your immediate and future financial requirements.

If you foresee significant expenses, maintaining liquidity is essential.

Emergency funds, educational expenses, or medical needs may require cash.

Impact on Financial Goals
Align your decision with your long-term financial goals.

Prepaying the loan reduces debt but may impact liquidity.

Evaluate how each option affects your overall financial strategy.

Tax Implications
Understand the tax benefits associated with home loan interest.

Section 24(b) allows a deduction on home loan interest payments.

Evaluate if prepaying affects your tax-saving strategy.

Emergency Fund Consideration
Ensure you maintain an emergency fund even after prepayment.

An emergency fund covers unforeseen expenses and provides financial security.

Do not exhaust your liquidity completely.

Alternative Investment Options
Explore alternative investment options if you do not prepay.

Mutual funds, fixed income securities, or other investments can offer better returns.

Ensure these investments align with your risk tolerance and financial goals.

Consulting a Certified Financial Planner
Consider consulting a Certified Financial Planner (CFP) for personalized advice.

A CFP can provide a detailed analysis based on your financial situation.

They help you make an informed decision considering all factors.

Making an Informed Decision
Evaluate all aspects including interest rates, liquidity needs, and tax implications.

Make an informed decision that aligns with your financial goals.

Both prepayment and continuation of EMIs have their pros and cons.

Final Recommendation
Based on the analysis, if the loan interest rate is higher than FD returns, prepaying is beneficial.

However, ensure you have enough liquidity for emergencies and future needs.

Consult a CFP to tailor the decision to your specific financial situation.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.


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