Recently, during a Q&A session, one person from the audience asked me ‘I have many loans to repay and have some surplus cash. What should I do with the surplus cash? Can I use the surplus cash for repaying my loans?’
Here is my view.
When you have many loans, I always suggest repaying the high interest loans first. It will reduce your interest outflow to a great extent. For example, you have a personal loan, a credit card outstanding, a car loan and a housing loan. The personal loan interest is 14% per annum, credit card interest is 48% per annum, car loan and housing loan interests are somewhere between 8-10%. The costliest debt is the credit card one and knock it off first so that you save on the interest outflow.
Having said that, debt also brings lot of emotions. It is stressful to deal with many loans and keep track of their due dates. During those stressful times, forget the high cost loan. Check for your smallest loan and repay it, though it is not the costliest one. For example, the personal loan outstanding is INR 5000, credit card – INR 75000, housing loan – INR 15 lacs and car loan – INR 35000. Paying off the smallest debt (personal loan in this case), will give you a sense of achievement and a huge relief. It will also give you the confidence that you can close off the remaining debts.
Closing the costliest loan is the intelligent way whereas closing the smallest loan is the psychological way.
You can choose any, depending on your situation. But, never take another loan for repaying your existing loans.