Sometimes we get unforeseen funds from different sources which was either unexpected or not calculated at the time of taking loan.The one shot thought we had in mind while getting a lump sum fund when we had a loan going on is to repay the but we should consider the following events before taking decision.
1 For our unforeseen contingencies we can keep it invested in reliable source where it could be liquidated immediately . Once you prepay a loan, this money cannot be easily borrowed, later.
2 If you have any unsecured debt (credit card or personal loan), pay it off at once! No risk-free investment can ever give you a higher post tax return than the post tax cost of such a loan.The difference is usually so high that even stiff prepayment penalties of around 3% to 5% will not change the decision.
3.As a thumb rule it makes sense to prepay home loans as long as the prepayment charges do not exceed 2% but we have two exceptions here:
- Where interest rates on the home loan are lower than the current ruling rate
- If principal repayment of the home loan, increases, the amount of deducted under Section 80C will also increase. This happens if you don't use the limit of deduction fully through other modes of investment such as life insurance premiums, contribution to provident funds, etc.