Loan Prepayment Benefits
When it comes to education loans, the decision of whether to prepay the loan before completing the studies or before starting the EMI payments may not be straightforward from the perspectives of RBI and tax regulations.
Banks offer a moratorium period on education loans where you can choose not to pay EMIs during that time, ensuring no financial pressure on your education expenses. However, some individuals start repaying the loan during this period to reduce the burden of interest. Let’s understand when this decision can be advantageous and when it might prove to be detrimental.
How Much Money is Saved by Prepayment?
The biggest benefit of prepayment is the savings on interest. If you repay a portion of the loan during the moratorium period, the principal amount decreases. Since interest is calculated on this principal amount, you can save significant interest costs, potentially amounting to lakhs of rupees.
Additionally, early loan repayment strengthens your credit score, making it easier for you to avail of future loans like home loans or personal loans.
Not Every Prepayment Deal is Beneficial
For education loans, under Section 80E, the government provides tax deduction on the interest paid. If you repay the loan quickly, the tax benefit may be available for a shorter duration or may even cease entirely. Therefore, if your income falls within the tax bracket, it is advisable to seek tax advice before making prepayments.
Is Repaying a Low-Interest Loan Always the Best?
If you have taken an education loan at a low-interest rate (such as below 7%) and have surplus funds, investing the money may be a better option than prepayment.
By investing in mutual funds or government bonds, you can earn returns of 10% or more annually, which could be higher than the interest saved by repaying the loan.
What Should You Do?
If you are not in a tax slab and wish to get rid of debt quickly, prepayment of education loan can be an excellent option for you.
However, if you are availing tax benefits or have a very low loan interest rate, it is better to invest that money wisely and strengthen your financial future.
