It’s better to use your investments to pay off loans

With the Reserve Bank of India’s six-month moratorium on equated monthly instalments ended on 31 August, individuals who have had to endure the covid-19-induced pay cuts, job losses and rising debts are not sure how to repay their existing loans. While loan restructuring is a useful and timely financial scheme, it risks putting borrowers into a debt trap, which must be avoided at all costs. The idea behind loan restructuring is good as it seeks to provide relief to financially stressed borrowers by reducing the EMI amount or getting another moratorium on the principal, at least till the individual’s financial situation improves. Two, given that the restructured loan will have a higher repayment period and/or a payment holiday, the overall interest paid during the duration of the loan will also increase. Second, compare the interest rate on your loan against the returns you are making on your various securities and assets like fixed deposits, bonds, shares and mutual funds.