Loan Repayment or Investment: What to do ?

Have surplus money ? It can be a dilemma for many people who are unsure of what to do with it: repay loan or invest On one hand, paying off debts can bring financial stability and peace of mind, while on the other hand, investing can bring in more money and help you reach your financial goals faster.

Let’s explore both options and help you decide what is best for you.

Repaying Loan:

Paying off loans, especially high-interest debt like credit card balances, can be a wise financial move. When you have surplus money, using it to pay off debts can reduce your interest payments and help you save money in the long run. This is because the interest rate on most loans, especially credit card debts, is usually higher than the rate of return you would receive from an investment. Additionally, paying off your debts can improve your credit score and reduce your stress levels, which can have a positive impact on your overall well-being.


Investing is another option for people who have surplus money. It can help you reach your financial goals, such as building an emergency fund, saving for a down payment on a house, or saving for retirement. There are many investment options available, including stocks, bonds, mutual funds, and real estate. However, it is important to remember that investing always involves risk and the value of your investments can fluctuate. Before investing, it is essential to understand the risks involved and make an informed decision.

If you get higher interest from investing the money as compared to the interest which you are paying on your home loan, then it is wise to invest.


Let us consider some examples,

Home Loan Rates 7-8% 

Gold Loan Rates 9-11%

Personal Loan Rates 13-15%

Business Loan Rates 15-20%

Credit Card Rates 33-36%


These are the various types of loans and their interest rates.


Now, considering different types of investment options


Bank FD & Debt Mutual Funds Interest Rate 5.5 to 6% 

Public Provident Fund  & Sukanya Samriddhi Yojana Interest Rate 7-7.6%

Gold & Gold ETF Interest Rate 8-8.5%

Commercial Paper, Corporate FDs Interest Rate 10-12%

Equity, Index Funds, Mutual Funds Interest Rate 13-15%


If we consider home loan, for example, then we can find that we get more interest in mutual funds than home loan interest.


So, if you have surplus money then you can invest in mutual funds rather than pre-payment.


But, wait !!


Here are some exemptions.


Following are certain conditions in which you should opt for repayment


  1. If you are near retirement : If you are about to retire, then you should opt to clear off your loans first.
  2. Home Loan is from NBFC or small finance banks: Then you should pay off the loan, because these have higher interest rates
  3. If you have recently taken a loan then, you should make a pre-payment if you have surplus. This is because in the initial years the emi contains more interest than principal. So, pre-payment will help you save interest.

Which option is best for you?

In conclusion, both repaying loans and investing have their benefits and drawbacks. The best option for you will depend on your individual financial situation, goals, and risk tolerance. It is always a good idea to consult with a financial advisor to help you make the right decision for your specific circumstances. By making smart decisions with your surplus money, you can help secure your financial future and achieve your long-term financial goals.