Individuals servicing debt could often face a dilemma on how to prioritise between multiple loans. In such cases, it is always advisable to follow a calculated approach to pay off the debt. The golden rule usually is to first service the loan which has the highest interest component.

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According to Gaurav Chopra, Founder & CEO, IndiaLends, the strategy that is more preferred is to pay-off the costliest loan first in order to reduce the interest cost burden.

With the costliest loan, Chopra does not mean those loans with high Equated Monthly Installment (EMI) rates but those loans that have a higher interest rate.

“Considering credit card loans carry the highest interest burden (40-45 percent) annually, as compared to a personal loan (12-20 percent) or housing loan (8-15 percent), it is important to pay off a credit card first,” Chopra suggests.

Also read: Signs that show you are nearing a debt trap and how to overcome it

Meanwhile, Sumeet Srivastava, CEO & Founder—Spocto Solutions Pvt. Ltd advises individuals to first look into the types of current loans they are liable to pay while clearing debt.

"For instance, personal loans, or any mortgage-related loans are high on interest and pledged value as well being unsecured. Hence, they should be paid off when the disposable amount is at hand. Home loans and education loans attract a tax benefit and should feature at the bottom of the loan repayment priority list for a borrower,” he opines.

Between a high EMI home loan and a personal loan, it is advisable to repay the personal loan first.

Also read: What is a loan against securities and should you avail it?

In addition, as Chopra says, secondary terms such as pre-payment penalties and how much principal (vs interest) are remaining needs to be considered too.

"For example, repaying a 15 percent loan with 0 pre-payment penalty charges may be preferred over re-paying a 17 percent loan with 3-4 percent pre-payment penalty. Similarly, repaying a loan with a longer tenure might be a better option as a substantial part of the interest cost could still be saved," he suggests.

However, as Suman Gandham, Founder and CEO, Finin says, all loans are bad and it is important to pay all the debt as soon as possible.

"The debt cycle is a rather vicious one especially among those who do not exercise financial discipline. Financial independence and smarter money management will always result in lesser debts and more stability," he opines.

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(Edited by : Ajay Vaishnav)

First Published:Dec 9, 2020 12:23 PM IST