Your Queries (Loans): Pay off the more expensive home loan first if you have surplus funds

However, if you do not have an adequate emergency fund, then your first priority would be to keep that surplus aside. Any amount above this should be used to reduce your liability.

By CHAITALI DUTTA

I took a Rs 15 lakh home loan at 8.5% interest rate five years back. Outstanding principal balance is Rs 13 lakh. I took a second loan of Rs 28 lakh a few months ago at 6.7%, of which Rs 19 lakh has been disbursed. Now I have some surplus money. Should I use it to prepay the first loan or the second loan?
—Arnav Somnath Gore
It is always advisable to pay off the more expensive loan first. Here in your case, the old loan is at a higher interest rate. Make a bulk payment in that loan with the surplus amount available to you.

I took a home loan 10 years ago. Now, I have some funds. Should I pay a part of it in one go or pay every quarter to keep some funds for emergencies?
—Piyush Kumar Garg
Financial planners suggest that we should keep 4-6 months of living expenses for the month, as an emergency or contingency fund. For example, if your family expenses are Rs 50,000 and your EMI is Rs 25,000, then your emergency fund corpus should be Rs 3-4.5 lakh. This amount may be spread out between your savings bank account balance/ bank FD/liquid fund. If you have an adequate emergency fund, then use the full surplus to pre-pay your loan in one go. However, if you do not have an adequate emergency fund, then your first priority would be to keep that surplus aside. Any amount above this should be used to reduce your liability.

The Deposit Insurance and Credit Guarantee Corporation (DICGC) on bank deposits is now increased to Rs 5 lakh. Does the amount include all bank deposits, PPF, senior citizen schemes deposits, Sukanya Samriddhi, etc., or only bank deposits?
—Rupa
Your understanding is correct. The DICGC cover will include only the bank savings and current accounts, fixed deposits, recurring deposits held by the depositor in that bank in the same capacity and same right. It does not cover the central and state government-backed schemes. In such a situation, we suggest that you and your spouse have various accounts in the four capacities: individually- you and your spouse, joint with you as primary, joint with your spouse as primary. This way your deposits will be covered by DICGC to the extent of Rs 20 lakh.

The writer is founder, AZUKE
Personal Finance Advisory (www. azukefinance.com). Send your queries to [email protected]