NOT prepaying the loan may make you wealthier

Loners have a tendency to prepay the loan as soon as possible because of their mental discomfort of being in debt. But financially it doesn’t make sense to prepay it as early as possible, because it will strain you financially and emotionally again.

Experts say, once you took the loan, invest it to buy property or utilize it profitably, so that you can pay the EMIs on time without straining your pocket. For example if you have a loan which charges you 10 percent per annum, there are two things you can do. First, you prepay the loan as soon as possible or secondly you invest it into funds which will earn you more than 10 percent, beside it depends upon your risk appetite and time horizon of the investment. Hence you can gain an extra opportunity cost based on this.

You are paying your EMIs at 10 percent but investing in bonds and stocks is fetching you a profit of 15 percent, then this after paying the EMI at 10 percent you will have this surplus fund 5 percent of finance, which is known as opportunity cost.

If any investment instrument provides you a long term rate of return, which is higher than the rate of interest of your loan, than it would be financially profitable deal to invest and pay the EMI with the profits made from the higher rate of return than prepaying the loan. It will save you on the lower rate of interest.In fact some loans have tax benefits too, such as home loan repayments are tax free under section 80 C.

Hence a loan can be a great tool to build your wealth. Just remember to take the amount of loan you can afford without adding financial stress, and thus gain from the contingency fund as well.