Loan is a hindrance to your freedom, regardless of what excel might show

Many of us take loans for various reasons, primary one being loan to buy a house. It is a double edged knife, while it allows us to buy our own house it also drags us into a money sucking drain which elongates the freedom dream.

An excel calculation will show that keeping a home loan with low interest rate is a financially sound decision, since you can get income tax deduction on interest paid, and earn a higher interest rate on investments made instead of repaying the loan. What the excel calculation wont show is the constant burden that you feel everyday due to the loan. Also it wont show the anxiety you feel because of the risk of change in interest rate on your floating rate loan.

Having a loan might be a good financial decision but its a bad emotional decision

Trust me, you will do a great service to yourself by closing out the loan fast and as soon as possible because that frees your mind to pursue other things which you could not concentrate on earlier due to the loan. It will give the single biggest push to your financial freedom journey.

From personal experience I know that whenever one gets some cash, there is a dilemma if one should pre-pay the home loan or invest the amount. Logically the investment is likely to earn a higher return 12–15% based on past market returns while the home loan interest rate is 8–9% thus allowing a surplus of 3–6% and therefore many people choose to invest in mutual funds instead of pre-paying the loan or reducing the loan amount by lump sum repayment.

In my view investing has only one advantage while you still have home loan, and that is building a SIP habit.

Do not get into the honey trap of income tax rebate and better investment returns, put every penny to close out the loan first. Being debt-free is the first step towards having a financially sound life. There is a reason why the previous generations of grand parents have been averse to loans. The intangible benefits of being debt-free far exceed any financial benefit that may accrue to you.

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