I currently have two personal loans. I’m expecting to receive a large bonus by the year end.Should I use that towards repaying my loan or is it a better idea to invest it in a savings account?

While I would say that getting rid of debt is always a prudent idea, sometimes it might make sense to check a few other factors before shifting the funds towards paying off a loan. One of the things you could consider is the interest rate that you are paying on your loan. If it is comparatively higher than what you would earn from the interest on a savings account, then I would suggest that you take the wise step and settle the loan first.

With regard to calculating financial returns, you need to have pertinent knowledge about the market and the available investment products. Then you need to look for accessible options so that you can make your money work for you.

That said, if that extra money you are going to get is enough to settle your entire loan, then get it done. If not, one option is to do balloon payment and make a partial settlement.

This will definitely reduce your monthly repayment against the principal amount and would create additional savings, which can further be invested in a monthly investment savings scheme depending on your long or short-term requirement.

Moreover, if you want to invest the forthcoming bonus amount into high returns like investment in property or another venture, then that’s a different prospect as it might fetch you long-term good returns.

In case you are planning to park the money in mutual funds or a savings account, then prompt and due diligence is required. You need to do some homework; you need to understand what the product is, what the benefits are, when the returns are expected, how much your input is going to be and so on, to calculate your profit margin with that extra sum.

So calculate wisely on saving and interest rate proportion and accordingly decide whether saving is giving you more profit or settlement of the existing debt is more beneficial.

Source: Friday Magazine, Answer given by Dhiren Gupta Managing Director, 4C Mortgage Consultancy