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Module Units
- 1. Introduction
- 2. Financial Position
- 3. Emergency Funds
- 4. Financial Habits
- 5. Budgeting
- 6. Financial Goals
- 7. Basic Things To Know While Making A Financial Plan
- 8. Concepts For Successful Financial Planning
- 9. Risk Appetite And Risk Tolerance
- 10. Risk Profiling
- 11. Things You Should Keep In Mind While Investing
- 12. Time Value Of Money
- 13. Power of Compounding
- 14. Inflation Affecting Investment
- 15. How To Plan For The Different Stages Of Life?
- 16. Stage 1: Our First Job
- 17. Stage 2: Marriage And Settling Down
- 18. Stage 3: Financial Freedom
- 19. Loans
- 20. Different Types Of Interest Rates
- 21. EMI
- 22. Plan Your EMIs
- 23. Rising Interest Rates - What Should You Do?
- 24. Is It Always Beneficial To Prepay Your Loan?
- 25. Debt Management
- 26. Loan Restructuring
- 27. Planning For Our Children’s Future
- 28. Effective Strategies To Build An Education Corpus
- 29. Making Your Investments
- 30. Retirement Planning
- 31. Major Expenses Of A Retired Person
- 32. Investor Traits Affecting Retirement Planning
- 33. Myths Associated With Retirement Planning
- 34. The Golden Rules Of Retirement
- 35. Conclusion
Is It Always Beneficial To Prepay Your Loan?
Previously we have discussed how prepaying loans can be an option when interest rates are on the rise. But is it always beneficial? Let's see:
There are some investors who once they have taken a loan, prefer to prepay it as soon as possible because the idea of being ‘in debt’ is not comfortable for them.
This is a personal matter and while there is no question that these investors genuinely feel uncomfortable about the loan It is not always necessary that prepaying make financial sense. The simple reason for that is the opportunity cost of your money.
For example, if you have a loan which is charging you interest at 10% p.a., and you suddenly come into some surplus funds.
You know that you can either use these funds to prepay full or part of your loan, or to invest. The first thing you should do is check the opportunity cost of these surplus funds.
Would it make more sense to prepay the 10% interest loan, and thereby save yourself from paying the 10% interest?
Or would it make more sense to invest the funds into an investment product that can generate more than 10% return - based on your risk appetite and time horizon?
If there is an investment instrument which would give you a long term rate of return that is higher than the rate of interest you are paying on your loan, it makes financial sense to invest the funds and earn the higher rate of return, than to prepay the loan (in full or in part) and save yourself the lower rate of interest.
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