Personal Finance Dilemma 4: Prepay Loan or Spend Your Bonus

We have to often deal with many interesting tight-spots as far as our day-to-day money matters are concerned. So how do we choose the best alternative? What are the pros and cons to be weighed before saying yes to one of the options? Let?s try and get some useful solutions to a few of such challenges.

Last in this mini-series of conflicts ? Foreign trip or loan prepayment

You have received an unexpected bonus. It has always been your dream to vacation in Singapore with your family. But, given the expenses involved, it has remained an elusive dream till now. This, therefore, is a great opportunity to fulfill your dream as this money was anyway not expected.

However, on the other hand, you have a personal loan to pay off.

You ponder ? will it not be better to repay the debt and save the huge interest expense. Or this time should I live my dream?

For personal loans, it is recommended that the EMI should not exceed 10-15% of your monthly take-home pay. Therefore, if you are closer to or higher than this number, you may be better off repaying the personal loan from your bonus.

However, if this ratio is only say 5%...have a nice trip.

[Note: I have seen instances where people have money lying idle in FDs and earning 8-10%, while they are paying 12-15% on their loans (or even 30-40% on their credit card outstanding balance). This makes no financial sense. If you have a similar situation, immediately break your FD and prepay the loan.]

Source: http://thewealtharchitects.blogspot.com/2012/10/personal-finance-dilemma-4-prepay-loan.html

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