In each edition of ET Wealth, our panel of experts answer questions related to any aspect of personal finance. If you have a question, send it to us immediately at [email protected]

I am 52 years old. I have a home loan balance of Rs 18 lakh payable over the next 7 years and a student loan of Rs 45 lakh for which the EMI has not started but I am paying interest of Rs 35,000 per month . I have a Jeevan Saral policy with a current cash value of around Rs 25 lakh, which I can continue for another 13 years. I pay a premium of Rs 36,000 each quarter for this policy. Apart from that, I have another Rs 2 crore term insurance policy. I can work another 8 years before I retire. My question is: should I buy back the insurance policy to partially repay the student loan or should I choose the EMI method for the next 8 years? If your advice is to close the insurance, where should I invest the interest and EMI savings?

Raj Khosla, Founder and CEO of responds: You should not touch your insurance plan for early repayment of loans. The cession of the Jeevan Saral policy will result in the loss of pension capital as well as the accrued benefit of appreciation in value at maturity. To keep your current cash flow manageable, make sure your fixed monthly obligations such as EMI for home loan, EMI for student loan, and insurance premiums are less than 50% of income. net. To reduce the monthly debt load, it is rather recommended to opt for a loan against insurance contract at a lower interest rate than the education loan. You can borrow up to 80% of the current cash value and the amount will be adjusted at maturity. The maturity amount will continue to appreciate in accordance with the policy document. Use the loan amount to prepay the student loan and save interest charges. Interest savings should be invested in two or three large cap mutual fund SIPs for at least 5-7 years. Continue to serve the EMI adjusted home loans and student loans based on the respective loan schedules. Thus, you will also enjoy tax benefits on both loan accounts. After 5-6 years, prepay the student loan with the mutual fund. The student loan tax benefit is available for 8 years and you will be able to close your child’s account within the allotted time. So, in the long run, you will save your retirement corpus, minimize interest costs and take advantage of the tax advantages available throughout.

I have to spend around Rs 20 lakh on home improvement. I am not sure if I take a personal loan. But I don’t want to touch my savings either. I have Rs 5 lakh set aside in home improvement mutual funds, but Rs 20 lakh would mean tapping into my retirement mutual fund investments. What should I do?

Raj Khosla Founder and CEO, responds: Banks currently offer low ten-year interest rates for loans. You should therefore opt for a bank loan and refrain from touching your mutual fund investments and your retirement fund. Stay invested and build a larger body over the long term. Personal loans are ideal for urgent cash flow needs for 3-5 years. The loan can be approved the same day with minimal documentation. Currently, personal loan interest rates range from 10.25% to 18% with a declining balance, depending on the borrower’s income and repayment capacity. Consider opting for a secured loan such as a home loan. The interest rate for the LAP will start from 7.5% up to 15-20 years. The IME will be more affordable. Plus, you’ll have more flexibility to prepay the loan in fewer years, depending on your cash flow. Compare different bank transactions for factors like interest rate, post-disbursement services, processing fees, penal fees, prepayment flexibility, and foreclosure fees before finalizing options.

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