Key Takeaway
If your loan interest rate exceeds your expected post-tax investment return, prepay the loan. For example, prepaying a 9% home loan beats investing in 7% FDs but may not beat 12% equity SIPs after tax.
Loan Details
Surplus & Returns
Recommendation: Go for Invest Surplus
By choosing this path, your estimated net advantage is ₹26,101 over the alternate route.
Net Wealth Comparison
Core Principle: Opportunity Cost of Capital
- Interest Arbitrage: If your expected investment return (e.g. 12% mutual funds) is higher than your loan interest rate (e.g. 8.5%), investing surplus capital generally builds more wealth than prepaying the loan.
- Debt Freedom vs. Growth: Prepaying a loan offers a guaranteed risk-free return equal to your loan interest rate. Mutual fund returns are expected but not guaranteed.
- Freed Cash Flow: Prepaying allows you to close the loan much faster (e.g., payoff in 9.2 years instead of 15 years). Once closed, you can direct your entire freed EMI into investments, accelerating your portfolio growth.
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Frequently Asked Questions
When does prepayment beat investing?
Prepayment wins when: your loan interest rate exceeds expected post-tax investment returns, you've exhausted 80C benefits, or you want guaranteed savings (prepayment saves a guaranteed X% vs uncertain market returns).
What is the opportunity cost of prepayment?
Every rupee you prepay earns a 'guaranteed return' equal to your loan interest rate. If your home loan is at 8.5% and you can earn 12% after tax in equity, investing has a 3.5% opportunity cost advantage.
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