Aakash, like most people, is uneasy at the thought of retiring without settling his outstanding debts. He does not want monthly liability EMI in his retirement years. This is a decision that requires sound financial consideration. If his money can be invested at a rate higher than the cost of the loan, it would be better to invest the money rather than pay off the loan. But as a retired investor, they need less risk. Investmentwhich cannot produce so much Return,

Akash has to consider the impact of his decision to repay the loan on other aspects of his retired life. Their retirement income will be low and they may have to cut back on their frequent travel plans, if a part of the money is used to prepay the loan. But this helps them to get rid of the mandatory monthly commitment of EMI. It may be prudent to reduce fees on retirement income to enjoy higher flexibility.

Tax benefits from loans may also be limited. Since the loan has only five years left, the monthly EMI will have more principal than interest. Hence the tax benefit on interest will be limited. The tax rate applicable to their income after retirement will be reduced, which also means that the tax savings from interest may not be significant.

The argument in favor of holding the loan is weak. If he has enough amount (after loan prepayment) to cover his expenses in the next 25 years, Aakash will be better equipped to pay off his outstanding loan. Then he can look forward to a stress free retired life.

Content on this page is courtesy of Center for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.