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Which Loan Should You Pay First – Personal, Auto Or Home Loan?

ICICI Securities 04 Mar 2022

There are various type of loans that a person can avail

  • The loan with the lowest cost should be settled first to reduce the cost of the loan
  • Typically, a personal loan is the costliest, followed by auto and home, so pay it off first
  • An auto loan helps fund a depreciating asset, unlike a home loan, so settle it next
  • Home loans should be settled last as they are low-cost and help build an appreciating asset

It is not unusual for households to have multiple loans. A typical household has home and auto loan EMIs (equated monthly instalments) running at the same time.

Sometimes families or individuals may be forced to add a personal loan in case of emergencies. A lot of households faced the additional burden of personal loan EMIs due to medical and other emergencies when the Covid-19 pandemic was at its peak.

If you are among those and are now looking to reduce your EMI burden, it would make sense to take a calculated approach towards settling your loans. So how do you go about it? Should you pay your home loan, which is usually the largest, first or the personal or auto loan, which may be smaller loans? Read on to find the answer to which loan should you pay first—home, auto or personal?

Consider The Interest Rate

According to experts, when you have multiple loans, it is advisable to prepay the one with highest rate of interest compared to others. This is because the interest cost adds up to increase the total amount you owe to the lender.

Typically, personal loans are in the range of 10-15 per cent, auto loans are available at 8-12 per cent and home loans at 6-12 per cent, annually.

In most cases, the loans with the highest interest rate are personal loans. Personal loans are usually unsecured loans and are generally advanced based on the borrower’s credit history and ability to repay the loan from the available income sources. When you close off this high-interest loan soon enough, you will also have some surplus funds at your disposal.

Next, you could attempt to pay off your auto loan, which may have the second-highest rate of interest. Also, remember that your vehicle is a depreciating asset (which means its value keeps decreasing as time passes), so the sooner you pay off the loan, the better it is.

On the other hand, home loans, typically, have the least interest rate of all the loans taken and help you build an asset, which you can use yourself or bequeath to the next generation. Moreover, the value of the house will appreciate over time unlike a vehicle’s value.

Consider The Tax Benefits

Repayment of personal or auto loans do not provide any tax benefit, but the home loan does. Both the principal and interest repayments of a home loan are eligible for tax deduction under the Income-tax Act, 1961.

The principal repayment is deductible up to Rs 1.5 lakh under Section 80C and can help you exhaust the tax-saving limit, subject to certain conditions. On the other hand, the interest repayment offers deduction benefit up to Rs 2 lakh under Section 24B, subject to certain conditions.

In view of the above considerations, it’s best to pay off the personal loan first, then move on to settling the auto loan, with the home loan coming last in the pecking order.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. Please note, loans related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing.

ICICI Securities Ltd. acts as a referral agent to ICICI Bank Ltd. for loan related services & the loan facility is subjective to fulfilment of eligibility criteria, terms and conditions etc.

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