Sunday, November 7, 2010

Too many liabilities

Today as I was going through my various liabilities, I was wondering how to go about clearing them all.
I have an outstanding Housing Loan, a Car Loan and then 2 credit card bills to be cleared. Ofcourse I am able to pay my EMI's for the car and housing loan without any issues, but then getting them closed earlier is always something one has in mind.

Now if one looks at the various interest rates, its no brainer that one has to clear off the credit card bills first. They attract anything betweem 2% to 3.5% per month , that is around 24% to 36% an year, while your housing loan interest rate would be around 8-10% and the car around 10.

If you have more than 1 credit card bill to be cleared and not possible to clear all, clear the one with the least payment due. Remember that if you get rid of interest payment on one it will be better than having on both.
Then comes the priority of the other credit cards. Once all the credit cards are done, then shift to the other liabilities. I would normally leave the home loan as it is , if you have a car loan also to clear. Its because, on home loan you still have the tax benefits attached , while that for the car loan its not. On completion of the car loan move to the home loan. Having said that, in many of the banks part payment of car loans is not allowed. In such cases, it would somehow make sense to clear a little of home loan itself, and leave the car loan to get completed on its own, or wait for it to reduce till it becomes small enough to pay the entire amount.

From my experience, SBI car loans allow part payments. They do have rules that you cannot pay any amount in the first year.

At times I am in a dilemma, as to whether to clear the home/car loan or keep the money invested since I would need the money incase of emergency or new expenses. Thats always been a tough call for me to handle. I try and calculate how much is needed for my emergency, and once reaching that, I repay some of the loans and invest some into instruments, which give higher rate of interest than the interest rate of the loan.  This point would vary from person to person and everyone should take a call depending on one's family requirements and emergencies, since at the end of the day, home and car loans are the cheapest compared to a personal loan.


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