Short answer: Clear anything above ~10–12% interest first (cards, personal loans); invest alongside cheaper debt like home loans.
Clear anything above roughly 10–12% interest before investing. Below that, invest alongside the repayment. The comparison is between the loan's rate and the return you could reasonably expect, and the loan's rate is the only one of the two that is guaranteed.
The order that follows from that
| Debt | Typical rate | What to do |
|---|---|---|
| Credit card revolving balance | 36–42% a year | Clear before anything else, including the emergency fund beyond one month |
| Personal loan | 11–18% | Clear before investing |
| Car loan | 9–12% | Borderline — prepay if the rate is above 11% |
| Education loan | 8–11% | Usually keep; interest often qualifies for deduction under 80E |
| Home loan | 8–9.5% | Keep and invest; prepay only for the certainty, not the maths |
Why a guaranteed 36% beats a hoped-for 12%
Paying down a card balance returns the card's rate, risk-free and tax-free. No equity investment offers that. Carrying ₹1,00,000 on a card at 40% costs about ₹40,000 a year; a SIP returning a historically reasonable 12% on the same ₹1,00,000 earns ₹12,000 before tax. Investing while revolving a card balance is choosing to lose roughly ₹28,000 a year for the feeling of making progress.
The exceptions worth knowing
Keep contributing enough to capture any employer EPF match before extra repayment — that is an immediate 100% return on the matched portion and it beats every loan rate. Keep one month of expenses liquid even while clearing debt, because the alternative to a small emergency fund is putting the emergency back on the card. And on a home loan, prepaying early in the tenure removes far more interest than prepaying late, since the early EMIs are mostly interest.
The honest caveat
Some people should prepay a cheap home loan even though the arithmetic says otherwise. Debt has a psychological weight that a spreadsheet does not price, and someone who sleeps better without an EMI is buying something real. Just make the trade knowingly rather than calling it the optimal move.
Put numbers to it with the free budget calculator and emergency fund calculator — no sign-up, works on any phone.
Frequently asked questions
Should I stop my SIP to clear a personal loan?
For a loan above about 12%, usually yes, and restart the SIP the month it clears. Keep any employer-matched EPF contribution running throughout — the match beats every loan rate.
Is prepaying a home loan ever worth it?
For certainty rather than returns. At 8–9% against a long-run equity expectation above that, the maths favours investing, but a shorter tenure has real value to people who dislike carrying debt.
Expense Tracker: Income Manager does the EMI, SIP and goal arithmetic in this article against your own numbers, and works in airplane mode. No account, no cloud sync.
