Prepare a prepayment hierarchy!

By BankBazaar | April 16, 2011

Bankbazaar gives you the guide for your prepayment hierarchy:

Costliest loan first:

The costliest loan is definitely the debt your credit card carries, an interest rate 45% per annum. It is very important to clear this debt off as soon as possible. If you think that it is fine to maintain the minimum balance, then you can never get over paying high interest rates towards higher amounts.

Loans sans tax benefits:

If you have a car loan and a personal loan, it will be prudent if you repay the car loan as the interest rate will be around 15% compared to the interest rates of personal loan which is around 28% p.a. Although the car loan comes with a prepayment penalty of 2-5%, prepaying the car loan first and then the personal loan will make sense. Since, these loans do not carry tax benefit options; there is no point in continuing the loan for the entire tenor.

Education Loan:

For an education loan, you are eligible for a tax deduction under section 80E of the Income-tax Act. You get the benefit of tax deduction on the interest part of the loan you pay. Since they carry an interest rate of 13-14%, it is not very expensive compared to the home loan or car loan.

Home loan:

Ranjit Dani, a Nagpur-based certified financial planner, says: “It is a long-term loan and it also gives a tax benefit on both the principal as well as the interest amount.” Under section 80C of the Income-tax Act, the principle repayment of up to Rs. 1 lakh can be used as a deduction. Under section 24 of the Act, you can get deduction up to Rs. 1.5 lakh for interest payment. If you hold a joint home loan then each individual can enjoy tax benefits.

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