Is it a Good Idea to Take a Personal Loan to Repay Your Home Loan - Home Loan Stories - Kotak Bank

What does it take to buy a dream home?
The answer is – a Home Loan. Yes, the biggest purchase of your life would probably be a house. And most people throughout the world cannot buy a house without the help of a loan.

What is a Home Loan?
A home loan is a loan provided to finance a house. It is a long-term loan with a comparatively low interest rate. The house acts as a collateral and interest rates can be floating and fixed. The loan can be used for buying the land, house, and for construction. With a home loan, you usually get tax benefits.

Two Situations
Home loans have to be repaid at regular intervals in the form of EMIs (equated monthly instalments). To repay regularly, you need regular inflow of funds. Sometimes, you may find  yourself in a situation where it is not possible to pay EMIs on time and sometimes you may be in a situation where you have to repay your home loan in full before the scheduled time, which is called foreclosure of your home loan. This is usually done when you want to sell your house, and for a foreclosure too, you would need funds.

Where do you arrange funds from?
Some people take personal loans or other loans in order to repay their home loans. Is this a smart choice? Loan for a loan? Does it work? Let's find out. However, before answering this question, you must know all about a personal loan and its purpose.

Personal Loan and its Purpose
A personal loan is an unsecured short-term loan with a high interest rate. Its most attractive feature is that no collateral is required, less documentation is needed, and it is disbursed fast. However, on the other side, the interest rates charged are high with heavier EMIs. Basically, this loan can be used if one needs funds urgently and when there is no cheaper source of finance available.

Does it make sense to use a personal loan to repay a home loan?
Consider the first situation, where you are unable to repay your EMIs. If you are going to take a personal loan for repaying your home-loan EMIs, then you are stepping into a debt trap. You are paying your low-cost home loan while burdening yourself with a high-interest loan. By doing this, you are generating more liabilities for yourself.

In the second situation, where you need to free your house from mortgage, basically to sell your house, you have to pre-pay your entire remaining home loan. Home Loan Pre-payment  requires funds. There are many sources to finance such a situation, but choosing a personal loan could make a hole in your pocket because of the high cost.

To summarise, because of the following reasons, it never makes sense to take a personal loan to repay a home loan:

  • Higher interest rates and other costs make it an expensive source of finance
  • Shorter repayment periods makes EMIs bigger
  • Difficult to acquire

 

Then What should I Do?
Look at all your options and you will surely find an alternate source of finance with a lower cost structure. Taking a high-cost loan for repaying a low-cost loan is not a wise decision. Be wise with your finance. Money leaves the unwise quickly, at times in the form of personal-loan EMIs.

 

Disclaimer: This Article is for information purpose only. The views expressed in this Article are personal and do not necessarily constitute the views of Kotak Mahindra Bank Ltd. and its employees

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.