₹20,000 extra every month: Why paying off your personal loan first may win over an SIP
With a ₹20,000 monthly raise, borrowers must choose between repaying a personal loan or investing in mutual funds. Clearing a high-interest loan first can save more in interest and result in a larger investment corpus compared to investing the entire amount monthly.
Got a pay raise? Have extra ₹20,000 every month? But how to decide what to do with the money: repay your personal loan faster or start investing it through a mutual fund SIP?
Let's crunch some numbers first to check which saves you more money
Let's assume you have a ₹5 lakh personal loan at 14% interest for three years. The monthly EMI works out to roughly ₹17,100. If you continue paying only the EMI, you would pay about ₹1.15 lakh in interest over the full tenure.
Now, after you get a raise, you suddenly have an additional ₹20,000 every month, and with that you can:
Use ₹20,000 to repay the loan
That way, instead of paying ₹17,100, you pay around ₹37,100 a month towards the loan. That way, the ₹5 lakh loan could be cleared in about 15 months. So now, you pay roughly ₹47,000 in interest and save nearly ₹68,000 compared with sticking to the original repayment schedule.
There is another advantage. Once the loan is cleared, you are free of EMI and can redirect the entire ₹37,100 per month towards investments.
Invest ₹20,000 through an SIP
Suppose you continue paying the ₹17,100 EMI and invest the additional ₹20,000 every month in an equity mutual fund SIP.
If the SIP earns an assumed 12% annualised return, ₹20,000 invested every month for three years could grow to roughly ₹8.62 lakh, against total investments of ₹7.2 lakh.
Obviously, this looks attractive. But if you dig deeper, the bigger picture unfolds.
What happens over five years?
If you first clear the loan in about 15 months and then invest the full ₹37,100 every month for the remaining 45 months, the corpus will be nearly ₹20.95 lakh after five years at a12% annual return.
In contrast, investing only ₹20,000 every month for the entire five years would create a corpus of about ₹16.33 lakh.
(12% return is only an assumption, while the 14% loan cost is contractual.)
So, for a high-interest personal loan, clearing the debt first can be the more effective and financially sensible choice. Once the loan is paid off, the freed-up EMI can be redirected to investments.
The decision can change if the personal loan rate is relatively low, or if the investment horizon is very long. Borrowers should also check whether their lender charges any prepayment or foreclosure fee before making extra payments.
About the Author
Sanchari Ghosh is an Assistant Editor at Mint with over 12 years of experience in journalism, specialising in personal finance, DLT & DeFi, geopolitics and foreign policy, with a particular emphasis on how these areas intersect. <br> She writes extensively about how money works in everyday life—helping readers navigate personal finance decisions. <br> As AI reshapes investing behaviour, capital is increasingly flowing into decentralized ecosystems, redefining how assets are managed, traded, and valued. She focuses on explaining how money flows within frameworks like Distributed Ledger Technology (DLT), DeFi protocols, and crypto markets—while also exploring what the future of money could look like in a trustless, programmable financial world. <br> She also focuses on immigration-related issues, simplifying complex topics around visas, passports, overseas financial planning, and the many practical challenges Indians face while moving or living abroad. <br> Alongside personal finance, Sanchari has a strong understanding of international politics, contemporary and historical conflicts, and global state decisions. She closely tracks how geopolitical developments influence economies, markets, and individual financial choices, bringing together finance and global affairs in her reporting. <br> She began her career as a desk editor, which gave her a strong foundation in news writing. Over time, her interest naturally shifted toward personal finance. Before joining Mint in 2020, she worked DNA, The Times of India, Outlook Money, BloombergQuint, and ETMoney. At Mint, she got an opportunity to expand her coverage to include immigration and geopolitical developments while continuing to closely follow personal finance trends and market movements.As a journalist, she is committed to accuracy, intellectual rigour, and fairness. <br> She is an English Major and her work took her across cities including Delhi, Mumbai, and Pune. Living independently from an early age gave her firsthand experience in managing life and money on her own. This practical exposure sparked her strong interest in personal finance. <br> Outside the newsroom, Sanchari is a sports enthusiast who regularly plays lawn tennis and squash. In her younger years, she was also a national-level badminton player.
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