Hey Rohith, Is it good to repay entire debt & become debt free ? Yes
Hey Rohith, Is it good to pay debt according to the tenure & invest for wealth creation ? Yes
Seems both perspectives are correct but it depends on how you are using the debt. Most successful business people use debt to increase thier assets and expand their company. There are some questions you need to ask yourself before deciding yes or no.
Where did the money being used for your debt ?
If you have taken loan from a bank at 7% interest rate and using that money to generate 12% return, then why on earth you are thinking about repaying the whole loan before tenure ? As long as you are consistent enough to get that 12% CAGR, kudos !! No problem for you.
Is it good to hold multiple loans for longer tenure ?
A big NO.
- There might be situation your friend came suddenly & asked you to repay complete money that you borrowed from him, which door will you knock man ?
- If you took loan from multiple banks, if suddenly federal reserve starts increasing interest rates due to any crisis or economic stability, you will become helpless
- If your employer delays paycheck or if you are laid off for some reason, do you have an alternative or will you take more loan to clear the loan ?
It’s highly unlikely that your financial journey goes on a smooth road without any ups & downs, so, never hold multiple loans.
Is it good to hold single loan with less interest rate which one can afford to pay easily ?
Many middle class people have the mindset of paying back loans quickly ASAP. Look through your lens wisely, the loan which you have taken is of less interest rate, don’t rush to repay quickly, understand if there are any better avenues to invest which generates you that so called alpha, extra return than the interest rate which you are paying. Never miss the opportunity of using free money to generate returns boss.
Some people can’t sleep on their pillows calmly by holding the loan weight on their heads, so, if it is costing your mental peace, never give a second thought. Start repaying your loan more when you get extra increment from your boss or when your savings pile looks high !!
If you have a home loan and getting benefit under section 80C, better not to repay too quickly. So, check which suits you better. One single advice may not fit everyone. We don’t have so called perfect rules in the world of finance.
Key Takeaways:
- Repay completely your high interest loan first if you are holding muliple loans
- Check for better avenues to invest extra money for better returns before completely repaying your single loan
- If you don’t want to mess your mental peace and if you don’t have financial knowledge, repay at your pace !!
