‘I am in a common loan trap’: Should I prepay loans or invest in the stock market? How can I make the most of my financial dilemma?

Hi Money Minder,

I’m stuck in a money mess and need your wisdom on what to do. Or maybe point me in the direction of a finance whiz.

So, here’s the scoop:

1. Home Loan: ₹22 lakhs at 8.45% interest (2 years in). 14 years to go
2. Car Loan: ₹6.4 lakhs at 8.8% interest (1 year down). 5 years left

Last month, I threw ₹1 lakh at the car loan, leaving me with ₹3 lakhs in cash. Now, I’m pondering the best way to use it.

Here are my options:

1. Pay off the Car Loan: My gut says chop down the car loan to get rid of it sooner and then tackle the home loan.
2. Pay off the Home Loan: On the flip side, I could start clearing the home loan right now. I bumped up my emi by 20% last year and cut short the tenure.
3. Dabble in Stocks: Another idea is to invest the cash in the stock market for potential juicy returns, although I know it comes with risks. Some stocks have been giving a nice 15% ROI lately.

Considering the interest rates and my situation, what’s your two cents? Here’s a bit about me:

1. Age – 25M
2. Dependents – My parents rely on me. I’m the sole breadwinner.
3. Monthly income – 1.3 Lakhs post tax. 70k goes into expenses, including loan emis and personal stuff.
4. Current Portfolio – 6 Lakhs in stocks at 15% returns, 50k in mutual funds, 2 lakhs in FD, 3 lakhs in liquid savings.

Should I zap the car loan first, or dive into the home loan? Or should I take a gamble in the stock market for those sweet returns?

Your thoughts, experiences, or tips would be a huge help!

Cheers,

Response from THE MONEY MINDER:

Hello There,

Hello,

I understand the financial dilemma you are facing, and it’s admirable that you are seeking advice to make the best decision. Given the details you have provided, it seems like you are in a good position to make significant progress towards your financial goals.

Considering your age, income, and financial obligations, focusing on reducing debt should be a priority. In your case, it might be more beneficial to continue prepaying your Car Loan, especially after having already prepaid ₹1 lakh last month. By further reducing the principal amount, you can save on interest payments and close this loan sooner.

Once the Car Loan is taken care of, you can then shift your focus to prepaying the Home Loan. Since you have increased your EMI by 20% and have already reduced the tenure to close it faster, continuing this trend will help you save on interest payments in the long run and be debt-free sooner.

Investing in the stock market can be a good option for potentially higher returns, as you mentioned. However, given your current financial situation and the need to prioritize debt reduction, it might be wiser to first tackle your loans and then consider investing the surplus funds once you are debt-free.

Remember, each individual’s financial situation is unique, so it’s essential to assess your own risk tolerance and financial goals before making any decisions. All the best from THE MONEY MINDER in achieving your financial goals!