Should You Pay Off Loan First or Start Investing? The Real Answer (With Examples)
Should you clear your loan before starting SIPs? It depends on your interest rate and goals. Here’s a simple guide to decide between debt repayment and investing.
If you’re earning, chances are you’re juggling two things — EMIs and the urge to start investing.
You might be thinking:
“Should I clear my loans first and then start investing?”
or
“Can I do both at the same time?”
The truth is — it depends on the type of loan, interest rate, and your financial discipline.
Let’s break this down in simple terms so you can make the right decision for your situation.
🏦 Step 1: Know Your Loan Type
Not all loans are created equal. Some are “bad debt” — they drain your money, while others are “neutral” or even useful.
| Loan Type | Interest Rate (approx) | Good or Bad? | What to Do |
|---|---|---|---|
| Credit Card | 30–42% | ❌ Very Bad | Pay off immediately |
| Personal Loan | 11–16% | ❌ Bad | Pay off before investing |
| Car Loan | 9–13% | ⚠️ Neutral | Can part-pay while investing small |
| Education Loan | 8–10% | ✅ Useful (if ROI on career is high) | Pay EMIs + Start SIP |
| Home Loan | 8–9% | ✅ Good (asset creation) | Invest simultaneously |
👉 Rule of Thumb:
If your loan interest rate is higher than 10%, focus on repayment first.
If it’s below 8–9%, you can safely start investing.
📊 Step 2: Compare Loan Interest vs Investment Return
Let’s assume:
- Your personal loan interest = 13%
- Mutual fund SIP average return = 12%
Even if your SIP gives 12%, you’re losing 1% every year by keeping the loan!
So it’s better to clear high-interest loans first.
But if your home loan is 8% and SIP gives 12%, the 4% gain makes investing smarter.
🧮 Step 3: The Hybrid Strategy (Best of Both Worlds)
If your income allows, you can do both.
Here’s how 👇
| Monthly Income | EMI | Savings Left | Suggested Plan |
|---|---|---|---|
| ₹50,000 | ₹20,000 | ₹10,000 | ₹7,000 for loan prepayment + ₹3,000 SIP |
| ₹80,000 | ₹25,000 | ₹20,000 | ₹10,000 loan prepayment + ₹10,000 SIP |
| ₹1,00,000 | ₹30,000 | ₹25,000 | ₹10,000 SIP + ₹15,000 emergency fund/loan prepay |
This way, your loan balance falls faster and your money starts compounding.
💰 Step 4: Build an Emergency Fund First
Before thinking of either SIP or loan prepayment — create an emergency fund worth 3–6 months of expenses.
Why?
Because if you lose your job or face a medical emergency, you shouldn’t fall back into new debt again.
🧠 Step 5: Tax Angle (Often Ignored)
Some loans like home loans and education loans give tax benefits.
- Home Loan → Up to ₹2L deduction (interest) + ₹1.5L under Section 80C
- Education Loan → Full interest deduction under Section 80E
So, in these cases, continuing your loan while investing can actually save tax + build wealth.
✅ Final Verdict
| If You Have... | Do This First |
|---|---|
| High-Interest Debt (>10%) | Pay off before investing |
| Low-Interest Asset Loan (<9%) | Start SIP while paying EMIs |
| Emergency Fund Missing | Build that before both |
| Tax-Benefit Loan (Home/Education) | Keep EMI + Invest |
💡 Smart people don’t just save — they balance.
Paying off debt gives peace of mind, but investing gives freedom.
⚠️ Disclaimer:
This article is for educational purposes only. Investment and loan decisions vary for each individual. Please consult a SEBI-registered advisor or certified planner for personalized advice.