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Should I use my gratuity money to pay my home loan?

Dhirendra Kumar explains when is it a good idea to prepay the home loan

I am a DIY investor and have invested in mutual funds through SIP for many years. I have a home loan at an interest of 6.9 per cent with an outstanding tenure of 4.5 years. Its monthly EMI amounts to Rs 20,000.
Further, I expect to receive a lump sum money as gratuity proceeds. Should I utilise it for clearing my home loan, or should I invest somewhere else?

-Crish

A home loan is the only loan that is good to have. All other loans are avoidable and should be repaid before you start investing. There are various reasons why there is no harm in carrying this loan. One is that you save on the rent, and the other is that you get a tax benefit on the interest you pay. Further, it comes at an extremely low cost. And the return on long-term investments generally tends to be higher than the cost of borrowing. So it turns out to be a profitable deal.

In your case specifically, if you are apprehensive about future income or derive great comfort by repaying the loan, then you must utilise the gratuity money to repay the loan. On the other hand, if you are confident about future income flow and the burden of the loan does not make you worry, you should continue with the home loan.

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