Prepay Loan vs Invest: Where Should Your Extra Money Go?
Prepaying an 8.5% home loan gives a guaranteed, risk-free return equal to your effective post-tax loan interest rate (~7.5% - 8.5%). Investing in equity mutual funds offers potential 12% returns with market risk.
Key Financial Takeaways
- Effective home loan interest rate is 8.5% (or ~7.2% if claiming Section 24b tax deductions under Old Regime).
- Equity mutual fund expected return is 11% to 13% long term.
- The Hybrid Strategy: Prepay 50% of surplus to reduce debt stress and invest 50% into equity SIPs.
Calculate Loan Prepayment Savings
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The Psychological vs Pure Mathematical Angle
Mathematically, investing beats prepaying as long as net investment returns exceed loan interest rate by at least 3-4%.
Psychologically, being debt-free provides immense mental peace and eliminates monthly cash flow vulnerabilities.
Frequently Asked Questions
Should I prepay expensive personal loans first?
Always! High-cost loans (personal loans at 12-18% or credit card debt at 36-42%) should be paid off aggressively before making any discretionary investments.
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