The key is striking a balance between wealth growth and debt reduction. You can keep making your EMI payments and invest any extra money to increase your wealth and keep your cash on hand.
Many people in the personal finance industry struggle to strike a balance between building money and paying off debt.
Consider Ms. A, who has a home loan of Rs 1 crore with an EMI of Rs 86,000 per month for 20 years. Let’s say she receives a raise in salary of Rs 24,000 a month, which would allow her to take advantage of the opportunity to invest or pay off her loan more quickly. Her financial future must be carefully considered in the long run before making this choice.
Aligning financial plans with life goals, risk tolerance, and future aspirations is more important than simply looking at numbers. This is one of the most important decisions in creating a stable financial future because both strategies—early debt repayment and strategic investments—have advantages and disadvantages.
Option 1: repaying the debt early
The loan period can be drastically shortened from 20 to 13.75 years by raising the EMI from Rs 86,000 to Rs 1.1 lakh. Over the course of the loan, this approach reduces interest expenses by Rs 35 lakh.
Pros:
- Immediate alleviation of long-term debt-related financial stress.
- Savings on interest costs are assured.
- Early release from a large financial commitment.
Cons:
- Liquidity is lacking in funds that are locked up in a home loan.
- Lost chances for possible increased investment returns
- Reduces adaptability for upcoming financial crises or objectives
Option 2: Put the extra money into SIPs
As an alternative, one might keep the current EMI and use the extra Rs 24,000 to fund systematic investment plans (SIPs), which have the potential to yield a 12% annual return. This strategy could generate Rs 1.6 crore in corpus over 17 years.
Pros:
- liquidity for unforeseen expenses or other necessities.
- Compounding yields profits that are substantially more than the interest that prepayment saves.
- Provides a hedge against inflation by diversifying wealth into equity markets.
Cons:
- There is a risk component because returns are reliant on market performance.
- It takes perseverance and self-control to maintain one’s investment strategy in the face of market swings.
Therefore, it is important to carefully consider both choices.
Early loan repayment offers guaranteed savings and psychological relief, but SIP investments have the potential to generate significantly more wealth over time. In addition to this, you need consider a number of additional factors.
1. Tax advantages: you can deduct up to Rs 1.5 lakh from your income for the principal and interest paid on your house loan. This lowers the loan’s effective cost, increasing the allure of investments.
2. Liquidity: While prepayments lock the money in an illiquid asset, SIPs offer flexibility and simple access to cash.
3. Risk vs. reward: SIPs include market risks but can beat the 8.5 percent home loan interest rate with predicted returns of 10–12%.
4. Time value of money: Compounding helps early investments increase exponentially over time.
5. Inflation hedge: SIPs are a superior inflation hedge than fixed loan repayment plans since they preserve purchasing power.
6. Diversification: By distributing capital among several asset classes, SIPs can lower the risk of concentration.
7. Opportunity cost: Paying off a debt early may require giving up the chance to earn larger investment returns.
8. Financial independence: By producing passive income, SIPs can pave the way for early financial independence.
9. Psychological comfort: While SIPs need a tolerance for short-term volatility, loan prepayment provides comfort by lowering debt.
10. Economic trends: constant or falling interest rates boost investments, while rising rates may favor prepayments.
A well-rounded strategy
In the end, the secret is striking a balance between wealth creation and debt payback. A combination approach might be the most effective for someone in this situation:
- To handle the debt in a methodical manner, keep up your regular EMI payments.
- To increase wealth and preserve liquidity, put the extra money into SIPs.
This allows one to benefit from the long-term development potential of equities markets while gradually lowering the borrowing burden.
The key takeaway
Debt may be a tool rather than an enemy. The greatest way to achieve financial freedom is to carefully balance building wealth with paying off debt. You can set off on a path that guarantees long-term success and peace of mind by taking liquidity, rewards, and risk tolerance into account. Utilize compound interest and discipline to transform financial difficulties into chances for development.
Disclaimer: The views expressed by experts on Faucetsky are their own and not those of the website or its management. Faucetsky advises users to check with certified experts before taking any investment decisions. Code: Monwtf2025