When it comes to personal finance, we've all heard the mantra: "Pay off your loans ASAP!" But what if we told you that there's a twist in this tale, a financial hack that might make you think twice? In this article, we'll explore why it might be advantageous to refrain from repaying or pre-closing loans, especially when considering underlying asset secured and low interest loan also read “Home loan”. Let us not involve unsecured high interest loans especially those pesky high-interest credit cards, personal loans, or car loans etc.

The Compound Interest Game: A 20-Year Financial Journey

Let's start with a bit of financial perspective, imagine you've got a home loan with a friendly interest rate of 9% which is average offer rate for home loans presently, and it's set to stay with you for 20 years.

Equated monthly installment (EMI) for each lakh at 9 % would carry 900 rs approx. Multiplying the EMI by 240 months (20 years), it becomes evident that you would pay back more than two times the original loan amount at 2.16 lakhs per each borrowed home loan lakhs including principal and interest payment. But you are doing this over 20 years’ time period with no much rush.

The 'Rule of 72': Doubling Your Capital

This is where the 'Rule of 72' comes into play. According to this rule, if you're able to invest your money at for example 12% return which is the average return on index fund, your capital will double in just 6 years. 72/rate of interest = number of years it takes to double your money, at 7.2% average fixed deposit offered by banks will double in 72/7.2 = 10 years.  In this context, each lakh you have invested could potentially grow to more than 9.64 lakhs at 12% over the same period of 20 years. The contrast between simply repaying your loan and allowing your money to grow via investment is striking at 2.16 lakhs vs 9.64 lakhs.

What about making part payments on your loan? Imagine diverting those funds into a systematic investment plan (SIP) or even investing whenever you have amount for prepay. The power of compounding can work its magic here as well. At SIP of 900 rs for 20 years at 12% ROI, the capital will grow to 8.99 lakhs.

Hence paying off your home loan would be making you poor, so to say. By investing your funds wisely, you could witness your wealth growing significantly faster than your loan diminishes. It's an alternative approach that can potentially yield higher returns in the long run.

Tax Perks and Liquid Hoarding

From the tax angle, holding on to your loans can be more rewarding. Self-employed individuals who show expenditures on loan interest may find themselves eligible for tax benefits. Additionally, the interest paid on loans can be deducted from your taxable income. On the other hand, investments in appreciable assets, such as equities, may not attract taxes until the time of sale. This can lead to significant savings over the long term.

Moreover, having your money in liquid assets provides a sense of financial security and flexibility in times of urgent need. Prepaid loan amounts, once used to reduce your loan balance, are not available on emergencies or for contingency fund at times of lay off etc. On the contrary, financial investments can be liquidated to meet unforeseen expenses, providing you with financial peace of mind.

EMI, Loan tenure vs. Income: The Ultimate Balancing Act

As time goes by, your EMI remains a fixed commitment, while your income is likely to increase due to factors like inflation and salary increments. As a result, what may initially appear as a substantial financial burden can become increasingly affordable in 5 to 8 years. Interestingly, this aligns with the average home loan cycle which is 8 to 10 years during which many people consider foreclosing their loans, once they have experienced significant income growth.

In conclusion, while conventional wisdom often urges us to pay off our loans as fast as possible, there's a hidden chapter in the financial playbook that tells a different tale. The power of compound interest, potential tax benefits, liquidity, and long-term wealth-building opportunities all contribute to this perspective. Before you rush to pay off your loans, consider this alternative route to financial success. Delaying gratification could lead to a financial adventure that's not just profitable but also uniquely rewarding.

Disclaimer:

This article provides general information and should not be considered as personalized financial advice. Always consult with a qualified financial advisor or professional to evaluate your specific situation and goals.