Loan Prepayment vs. SIP: Which Strategy Wins in Nepal?
This is the classic “Debt vs. Equity” dilemma. In the Nepali banking context, where interest rates for home and auto loans can swing between 8% and 14% within a single year, making the right choice is crucial for long-term wealth.
When to Pay Off Your Loan Early?
- High Interest Environment: If your bank’s interest rate is 12% or higher, the “guaranteed return” you get by saving interest is usually better than the “uncertain return” of the stock market.
- Peace of Mind: Many Nepali families prioritize being debt-free (Rin-mukt) for psychological security.
- Nearing Retirement: If you are within 5 years of retirement, reducing your monthly liabilities is wiser than chasing 15% SIP returns.
When to Choose SIP Over Prepayment?
- Low Interest Rates: If you secured a loan during a liquidity surplus at 8-9%, and the market (Mutual Funds) is expected to give 14-16%, the “Spread” of 6% is your pure profit.
- Liquidity Needs: Money paid to a bank is gone. Money in an SIP can be withdrawn in 3 days if you have a medical emergency.
- Tax Benefits: Remember, you get tax deductions on Home Loan interest. Reducing your loan too fast might increase your taxable income.
The Golden Rule: If the Expected SIP Return is at least 3% higher than your Loan Interest Rate, investing is usually the better mathematical choice. If the gap is smaller, pay the loan.