Sequential Order In Which Loans Should Be Repaid

Got extra cash and wondering which loan to repay first?

For most of the loan borrowers, repaying loans with higher interest rate appears to be obvious route. However, this task should not be put into action without incorporating a strategy to cut loose of unproductive debts first so as to make the most of the monthly EMIs.

Here is an ideal sequential order, in which loans should be repaid.

1) Personal Loan - Undoubtedly, personal loans being unsecured carry higher interest rate while they also attract higher pre-payment charges. Still, this loan should take priority over others to save big on interest outgo.

2) Loan against other assets - After personal loans, one should preferably free up assets that are mortgaged for loans such as loan against property, gold, insurance policies, etc. Rationale behind repaying these loans is the fact that they do not carry any tax benefit and also reflect a charge on productive assets. Loans with higher interest rates such as loan against property and gold loans should precede in priority over loans carrying lower interest rates such as PF, insurance policies, fixed deposits, etc.

3) Car Loan -  Loan on car or vehicle comes next in order as it does not entail any tax soap for an individual unless it is used for business purpose or owned by a self-employed individual. Moreover, car is a depreciating asset, therefore, continuing car EMIs till the end of its tenure is not recommended.

4) Education loan - Although interest on education loans is higher compared to car loan, yet tax benefit under Section 80E offsets the difference between the two loans. An individual can claim deduction for interest paid on education loan for a period of up to 8 years or the actual term of interest payment, whichever is earlier. Also, there is no ceiling on the amount that can be claimed for interest deduction in a year. Therefore, it is ideal to retain this debt over others.

5) Home Loan - Being one of the most common forms of debt that Indians hold, home loan fetches tax advantages in terms of both interest and principal payment under Section 24 and 80C. Also, added tax soaps for first-time buyers under Section 80EE further enhances the value of this loan. Because of these tax incentives, home loan should be paid only at last after other loans are settled. Apart from this, limitless deduction allowed on interest payment for second home enlists this loan into good debt. Ideally, repayment of home loan should be completed during the initial years of loan tenure, when interest component is higher than principal outgo.


While the above order reflects best possible way in which loans should be repaid, it could differ from one individual to other, based on interest rate and other factors. It is suggested that one should evaluate all aspects of existing loan to make a sound judgment.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. Reenika Avasthi is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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