Pay off Debts or Invest in 2023?

Pay off Debts or Invest in 2023 ? 

Interest rates are rising steadily. The home loan which was once available at 6.5% is now above 9%. In this context, should we use the surplus amount to pay off the debt? Use it to invest for higher returns? 

Now many people are getting this doubt.

It is up to the individual to decide what to do. For this, knowing some basic principles will help you make the right decision. Let’s find out what they are.

How is your financial situation? 

What are your options for debt settlement? 

This can be called your financial stability (solvency). If your assets exceed your liabilities, you are financially stable. 

For example you have a home loan of Rs. 30 lakhs. But, your savings and investments are Rs. 50 lakhs. You have the ability to pay off your loan with a single payment in case of job loss or other emergency. This strength of yours financially encourages you to focus more on investments rather than paying off debt first. Another point should be considered here. Even if your debts exceed your assets. Assume that you are paying those loan installments every month with your income without any hassle. Investments can always be chosen.

When the debts exceed the income and assets, try to pay off debts as soon as possible. Increase allocations to pay off high-interest credit card debt and heavy home loans. Many are trying to settle the load before the full term of their home loan. This is part of the effort to get rid of the debt burden quickly. But, some pros and cons should be taken into account.

For example, suppose you take a home loan of Rs. 50lakh at 7% interest for a period of 20 years. If you pay an additional EMI of Rs. 38,765 at beginning of the loan your loan tenure will be reduced by three months. About Rs1.15 lakh will be left as interest. But, if the same amount is invested in an index fund with an estimated return of 12%, there is a possibility of Rs 3.73 lakhs in 20 years.

Prepay of loans or investment – which one is better depends on the financial goals you want to achieve. 

A balance must be struck between debt repayments and investments. If you want to pay off the home loan quickly, it is better to pay 5% of the principal every year. Here you have to take a decision based on your financial situation. There is nothing wrong with wanting to get out of debt quickly. But, future goals should not be compromised.

• Understand your financial needs. Care should be taken to have sufficient amount through emergency fund, health, life insurance and long term investments. The idea of paying off the loan quickly without meeting these basic needs is not right.
• Interest paid on home loan up to Rs.2 lakhs, tax exemption is applicable to the principal up to the limit of Section 80C. If the interest rate is high, put as much as you can towards the home loan. Tax exemption should not be thought of here. Paying more in the initial days of the loan will reduce the burden.
• Suppose you have limited sources of income. However, if you want to pay off the loan quickly, you can try to increase the EMI to a level that you don’t have to worry about. At the same time, don’t compromise on your investments. Doing this allows you to focus on both the down payment and investments.
• Those who are close to retirement should try to clear the debt as soon as possible without a second thought. There is no problem in settling the entire loan at once. Make sure that you do not have to pay off the loan even after retirement.