Smart Steps to Debt Freedom

Do you also get confused sometimes about whether you should close a small loan first and be free from it, or pay off high interest loans, or focus on your long tenure home loan? Not just this, but do you also wonder whether you should save and invest or use that money for repayment? If yes, this story is just for you. Mandar Wagh explains the importance of debt management, how to prioritise loans and the thoughtful actions including Tax benefits and refinancing that can strengthen your financial future[EasyDNNnews:PaidContentStart]

Most Indian households today juggle more than one loan at the same time. A home loan might be running in the background for twenty years while a personal loan taken for a medical emergency or home renovation adds a second layer of burden. A car loan comes in between and credit card dues creep up without warning. This mix is not unusual and many families live with it for years. What complicates matters is that each loan comes with its own interest rate, rules, tax benefits and repayment flexibility. 

In such a situation, a natural and often urgent question arises. 

If you have multiple loans, which one should you pay off first. This question matters because the order in which you close your loans can either save you a significant amount of money or silently drain your finances over time. Many people assume they should simply continue paying all EMIs until they end but the real savings happen when you understand the structure of your debt and take smart decisions about prepayment. 

When approached correctly, loan repayment can reduce stress and free up money for investment and long-term goals. When approached casually, the same loans can continue to absorb a large part of your income without giving you any real sense of progress. Hence, let us understand this in detail to help you become a more financially aware individual. 

Why Loan Prioritisation Matters
To understand the importance of choosing the right loan to close first, imagine two salaried individuals. Both earn similar amounts and carry similar loans. One of them, let us call her Aditi, decides that she will clear her personal loan ahead of schedule because it has the highest interest rate. She cuts down on unnecessary expenses for a year and channels all her surplus money into closing it. Her friend Vivek continues paying all his EMIs regularly but does not prioritise anything. 

What do you think will happen next? Let’s understand this with a numerical example. 

Assumptions
▪️Personal loan: ₹4,00,000 at 14 per cent p.a., original tenure 5 years (60 months).
▪️Home loan: ₹20,00,000 at 8 per cent p.a., tenure 20 years (240 months).
▪️EMIs are calculated using the standard EMI formula. Both Aditi and Vivek pay the same starting EMIs for each loan.
▪️Aditi's strategy: she slashes discretionary spending and pays an extra ₹10,000 every month toward the personal loan in addition to its EMI until it is fully repaid; once that personal loan is closed, she redirects the full amount she was paying into the personal loan (EMI + extra) to prepay the home loan.
▪️Vivek's strategy: continues to pay only the contract EMIs on both loans and does not prioritise repayments. 

Key monthly EMIs (calculated)
▪️Personal-loan EMI (₹4,00,000 at 14 per cent for 60 months): ₹9,307 per month.
▪️Home-loan EMI (₹20,00,000 at 8 per cent for 240 months): ₹16,729 per month. 

So initially each person is paying about ₹26,036 per month in EMIs (₹9,307 + ₹16,729). 

What each person actually pays 

Aditi
▪️Months 1-24: pays personal EMI `9,307 + extra ₹10,000 = ₹19,307 toward the personal loan each month, and pays the home EMI ₹16,729.
▪️At month 24 the personal loan is fully repaid (closed early).
▪️Months 25-60: she redirects the entire ₹19,307 into the home loan in addition to the regular home EMI (i.e., home EMI + prepayment = ₹16,729 + ₹19,307 each month for the remaining 36 months). 

Vivek
▪️Months 1-60: pays only the regular EMIs - personal EMI ₹9,307 and home EMI ₹16,729. Results after 5 years Interest paid in 5 years (total across both loans) -
▪️Aditi: ₹7,27,235
▪️Vivek: ₹9,12,678 

Interest saved by Aditi vs. Vivek -
▪️₹1,85,443 (Aditi paid ₹1.85 lakh less interest in 5 years) 

Home-loan outstanding balance after 5 years -
▪️Aditi: ₹17,50,511
▪️Vivek: ₹19,67,879 

Reduction in home principal because of Aditi’s prioritisation + redirected payments -
▪️₹2,17,368 lower outstanding home balance after 5 years 

Personal-loan outcome -
▪️Aditi fully repaid her personal loan in 24 months. Vivek was still servicing the personal loan through the full 60 months. 

Summary
Aditi finishes the high-cost personal loan in 2 years, saves about ₹1.85 lakh in interest over 5 years, and reduces her home-loan balance by ₹2.17 lakh compared with Vivek. 

Vivek paid the same EMIs but did not shorten the duration of the expensive loan and therefore paid substantially more interest and ended up with a larger home balance. 

Aditi didn’t earn more; she repaid in the right order by attacking the highest-rate loan first and redirecting freed cashflows. She turned disciplined extra payments into large interest savings and faster progress on her mortgage. That’s exactly why loan prioritisation matters. 

Before You Choose, Know Your Loans
Before you decide which loan should be closed first, it is important to understand what you are dealing with. Many people know their EMI but do not know the interest rate. A few know the interest rate but have no idea how much principal is still left. Some do not know whether their loan offers tax benefits. Without knowing these basics, you cannot make a strong repayment plan. Start by taking stock of all your loans. 

A typical Indian household may have a home loan, car loan, personal loan, education loan and revolving credit card dues. Each of these has a different interest rate. Credit cards usually charge the highest interest, sometimes more than 25 per cent annually. Personal loans follow, often ranging between 10 per cent and 24 per cent. Car loans fall in the middle category at around 8 to 10 per cent. Education loans generally cost between 8-12 per cent. 

Home loans are usually the cheapest, often falling in the range of 7 per cent to 8 per cent. Once you understand this hierarchy of interest rates, the direction becomes clearer. The higher the interest rate of a loan, the more it costs you every month to keep it running. A loan with a very high interest rate silently eats into your finances even if the EMI appears manageable. 

The Smartest Way: Tackle High-Interest Loans First
If there is one principle that saves the most money in most situations, it is the high interest first approach. Loans that charge high interest grow quickly when left unpaid for long periods. Even when you are paying EMIs regularly, a large share of the EMI goes towards interest instead of reducing the principal. This means you carry that loan for a long time and continue paying heavy interest every month. The clearest example is credit card debt. Many people believe that paying the minimum amount due is enough. 

In reality, it only keeps the account active and does not reduce the principal meaningfully. If you keep rotating a credit card balance for several months, the outstanding amount can grow much faster than expected. A credit card balance of fifty thousand can rise by several thousand more in a short time because interest compounds monthly. Clearing this kind of debt should always be the first priority. Similarly, personal loans come next in the priority order. They carry one of the highest interest rates among structured loans and offer no tax benefits. 

Keeping a personal loan running while prepaying a home loan is usually not a good idea because you save much more interest by clearing the personal loan first. Once high interest loans are cleared, medium interest loans like car loans and certain education loans can be handled. Home loans, being the cheapest and most tax friendly, generally remain last in the repayment list. 

When Paying the Smallest Loan First Works Better
Although the high interest method is financially superior, there is another method that helps people stay motivated. This method is based on clearing the loan with the smallest outstanding amount first. It works by giving a psychological 

boost. When you close one loan quickly, you feel lighter and more in control. Reducing the number of EMIs you manage each month creates a sense of progress. For individuals who feel overwhelmed by juggling four or five loans at once, clearing the smallest one first can create mental relief. It may not save the most money but it can create the emotional drive needed to stay disciplined. 

For example, if someone has a small loan of fifty thousand, a personal loan of two lakh and a home loan, closing the fifty thousand loan first immediately reduces the number of EMIs. This small win helps them stay focused and commit strongly to the next loan. This method works best when stress levels are high or when a person needs the confidence of quick results. However, it should be used carefully because it may prolong the repayment of high interest loans if not monitored properly. 

How Tax Benefits Shift Loan Priorities
Some loans reduce your tax burden, which means the actual cost of borrowing becomes lower than the stated interest rate. Home loans are the most common example of this. When you pay interest on a home loan, you can claim a deduction under section 24 of the Income Tax Act. This directly reduces your taxable income. Similarly, the principal repayment qualifies for a deduction under section 80C, which further lowers your tax liability. For people who fall in a higher tax bracket, these deductions make a big difference. 

Suppose someone pays interest at about 8.5 per cent on a home loan. After accounting for tax benefits, the real cost of that loan may drop by 1-2 per cent, depending on their income slab. In simple words, although the Bank charges a certain rate, the government is giving you some of that money back in the form of tax savings. Because of this advantage, many financial planners advise that home loans should be the last ones to prepay. 

If you are aggressively repaying a home loan at the cost of not investing enough, you might lose out on long-term wealth creation. A balanced approach works better. Continue paying EMIs regularly and prepay only when you have surplus funds that do not affect your emergency savings or investment goals. Education loans also offer tax benefits under section 80E, although only on the interest portion. This makes them slightly less urgent than personal loans when it comes to prepayment. 

Before You Prepay: Key Charges to Know
Not all loans can be repaid early without extra cost. Some banks or lenders impose prepayment penalties, especially on fixed interest loans. Before making any repayment plan, it is important to check if your loan has a lock in period or a penalty for early closure. If the prepayment charges are high, closing the loan may not be the best choice immediately. For example, if a car loan has only a year left and the bank is charging a 4 per cent penalty on early closure, waiting for the regular EMI cycle to finish might be financially better. Prepayment conditions vary from lender to lender, so reading the fine print and checking updated terms is necessary. 

Prepay or Invest: What Works Best for You
A common dilemma is whether surplus funds should be used for prepaying loans or invested in Mutual Funds or fixed income instruments. The answer depends on comparing the interest rate of your loan with the expected return on your investments. If your loan charges more interest than what you expect to earn from your investments, then prepaying is the better decision. If the loan interest is low and tax efficient, investing may help you build better long-term wealth. 

Consider a simple situation. A person has a home loan at 8.5 per cent and the choice to either prepay it or invest in a mutual fund expected to deliver around 12 per cent over the long-term. In such a scenario, investing may provide better returns. On the other hand, if someone has a personal loan at 18 per cent, no reasonable investment can safely generate that kind of return, so the correct decision would be to close the personal loan first. This decision requires clear thinking and understanding of risk. Never compare a guaranteed loan interest rate with an uncertain investment return without considering volatility and holding period. 

Emergency Fund First Even with Loans
Many borrowers make the mistake of using all their savings to close a loan. While the intention is good, the result can be risky. Without an emergency fund, even a minor unexpected event such as a medical need or temporary job loss can force you to take another loan. This creates a cycle that becomes hard to break. A financially strong approach includes maintaining an emergency fund of at least three to six months of expenses. This ensures stability and protects you from falling back into debt while you are trying to repay existing loans. 

How Refinancing Helps You
Interest rates change over time and many borrowers continue paying higher rates because they never explore refinancing options. Refinancing means replacing your existing loan with a new one that offers better terms, usually a lower interest rate. It is similar to shifting your loan from one lender to another in order to reduce your monthly EMIs or overall interest cost. Many borrowers refinance when market rates fall or when another bank offers more attractive terms. This step can save a significant amount of money over the loan’s tenure, provided the processing fees and charges are reasonable. You must calculate whether the savings outweigh the costs before making a move. 

The Way Forward
Managing multiple loans is not just a financial task but a mindset shift. The moment you begin viewing your loans as part of a bigger financial picture, instead of isolated monthly payments, you start taking control of your money rather than letting your money control you. The path forward begins with understanding your entire debt landscape. This means knowing every loan you have, the exact interest rate you are paying, the outstanding principal, the remaining tenure, and whether any tax benefits apply. 

Once you map this clearly, the confusion disappears and a purposeful strategy emerges. With this clarity, the next step is to adopt a disciplined approach. Prioritise high interest loans so that your money stops flowing towards unnecessary interest payments. Preserve tax efficient loans like home loans for later, unless your future goals demand faster repayment. Balance emotional comfort and financial logic when choosing between closing small loans for motivation or large ones for savings. 

Maintain your emergency fund because financial stability is not only about repaying loans but also about staying protected from future shocks. Revisit your loan terms once every year since lenders change rates and refinancing may open fresh opportunities to reduce your burden. Most importantly, remember that debt repayment is a journey. You may not clear everything overnight, but every EMI that ends early and every interest rupee saved becomes a step toward freedom. 

Families that consciously manage their loans often find themselves with more breathing space, more confidence, and more capacity to invest for long-term wealth. You are not just paying off loans. You are building habits that strengthen your financial future. And once you see the difference these decisions make, you realise that becoming debt free is not only about closing a chapter. It is about opening a new one, where your money finally works for you and not the other way round.

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