Should I use surplus to close education loan?
I have an education loan of ₹24 lakh, obtained at an interest rate of 9.5% per annum. Over the last four years, I have paid off a substantial part of this loan and the balance is now ₹10 lakh. Is it financially-wise to pay minimum equated monthly instalments (EMIs) and invest elsewhere to generate higher returns or close the loan account as soon as possible? I also claim income tax exemption on the interest part of the education loan and will continue to opt for the old tax regime to claim this benefit. —Name withheld on request Given the rate of interest of 9.5% on the education loan, you can exercise the option of prepaying a major portion of your loan that can reduce your EMIs meaningfully in the future.
The income tax deduction on education loan interest payment is definitely a cherry on the cake for individuals who continue to file income taxes according to the old regime, where such deductions and exemptions are available. On the contrary, investments are tricky when the funds are parked in market-tradable securities. There remains a possibility of your funds going south in case a high risk and high return asset fails to meet return expectations.
Volatility is part of market-linked instruments, particularly those that can potentially generate higher returns. Investments are always considered the best for wealth maximization. When it comes to choosing between clearing off a high-cost debt and investing in a high risk and high return asset, repayments should take the lead.
You can definitely consider investing smaller amounts which don’t affect your repayment plans or your ability to close the loan sooner. Investing in a lump sum manner can resume once the debt is entirely cleared from your balance-sheet. A
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