I currently have two education loans. My parents are paying back one of them. Is it wise to pay back a part of the loan?

I currently have two education loans with the following details:

> Remaining balance of Rs 2.6 lakh at 11% ROI

> Remaining balance of Rs 21 lakh at 6.5% ROI

I also have a liquid emergency fund that can cover expenses for 6-7 months. Additionally, I have some fixed deposits and I actively invest in Mutual funds and stocks, resulting in a decent portfolio.

Recently, I received a performance bonus of Rs 3.2 lakh. While my parents recommend paying off the 2.6 lakh loan to reduce debt, my wife suggests saving/investing a portion of the bonus and using the remaining amount to pay half of the loan.

Advice by Akhil Rathi, Senior Vice President, Financial Concierge at 1 Finance

Loan repayment is a wise financial move as it reduces interest costs and financial burden, leading to greater peace of mind. However, prepaying a loan without fully analysing its financial impact may not always be the best decision. The key factors to consider are the interest rate, remaining tenure, and outstanding interest cost. If a loan has a high interest rate and a long tenure, prepaying it can lead to significant savings. On the other hand, if the loan is near completion, most of the EMIs go toward the principal, making prepayment less effective.

In your case, the 11% loan (Rs 2.6 lakh balance) is relatively expensive, making it a priority for repayment. However, the total tenure and remaining tenure of the loan are crucial in deciding whether prepayment is beneficial. If the tenure is long, paying it off can reduce future interest outflow. Meanwhile, the 6.5% loan (Rs 21 lakh balance) is at a much lower rate, making it less urgent for prepayment. Since this interest rate is close to what one can earn through stable investments, keeping this loan and investing the surplus funds might be a better financial strategy.

Your parents’ advice to fully close the high-interest loan is valid from a debt-reduction perspective, but your wife’s suggestion of partial prepayment and investment is also a balanced approach. Since you have a strong emergency fund, FDs, and a growing investment portfolio, you have the flexibility to make a well-thought-out decision. A good approach could be to pay a portion of the 11% loan to reduce the burden while investing the rest in growth-oriented instruments that align with your financial goals.

Ultimately, the decision should be based on your remaining loan tenure, total interest savings, and expected investment returns. If the 11% loan has many years left, prioritizing its prepayment makes sense. However, if only a few EMIs remain, investing the amount might generate better returns than prepaying. A strategic mix of debt reduction and investment growth will help you achieve both financial security and wealth creation.