A loan is temporary financial assistance offered to people by banks and financial institutions. It helps them make an investment, cover immediate expenses, etc., without exhausting their savings or disturbing their monthly budget. There are various types of loans available in the market to cater to different goals and needs of the people.
An individual is eligible to take two different types of loans, personal and housing loans, at the same time, but when it comes to the repayment of the loan, which loan should be kept at priority?
Here are some of the factors that one must take into consideration before prioritising the loans –
- Credit Score – A housing loan generally holds a long repayment tenure than a personal loan taken to manage immediate expenses. The applicant creates a credit history that positively adds to the credit score in the long term. So if one wishes to build a good credit score, they must settle their personal loan first and then focus on the housing loan.
- Tax Benefits – Housing loans offer an estimated Rs. 2 lakhs tax benefits and deductions to applicants annually, whereas personal loans do not offer any tax benefits to the customers. In such a scenario, settling personal loans will not hinder your taxes and should be paid first.
- Interest Charged on Loan – While some people tend to settle big loan amounts first and small loan amounts later, some prefer the opposite; however, one should focus on the applied interest rate on the loan amount. Banks and financial institutions charge high-interest rates on personal loans compared to housing loans. A high-interest rate adds extra pressure on the pocket. Thus, one must settle a high interest charging loan.
- Foreclosures Charges – Banks and financial institutions charge 3-4% of the loan amount on pre-payment of personal loans. The foreclosure facility is generally applicable after six months of the loan tenure in personal loans. If you have applied for fixed-rate loans, you will have to pay standard charges. There are no foreclosure charges applicable under floating rate housing loans.
- Additional Benefits – Housing loans offer their customers other benefits, such as top-up loans, overdraft facilities, etc., under temporary assistance. In contrast, personal loans do not provide any additional benefits to the customers, and therefore one must settle them as a priority.
Considering the factors mentioned above, it is advisable to settle the personal loans as a priority compared to the housing loans. Housing loans not only offer tax and other benefits but also available at lower interest rates. Personal loans, on the other hand, do not offer such benefits, and therefore, one must clear them off first.