Tip 1: Before you prepay, keep some money invested in modes that can be liquidated easily for unforeseen contingencies. Once you prepay a loan, this money cannot be borrowed back, easily at a later date.

Also Read: Saving for a Rainy Day

Tip 2: If you have any unsecured debt (credit card or personal loan), pay it off at once. No risk-free investment can ever give you a post tax return that will be higher than the post tax cost of such a loan. The difference is normally so high that even stiff prepayment penalties, in the region of three to five per cent will not change the decision.

Tip 3: Secured loans (especially home loans) are a little more complex because they are low cost and may also have certain tax benefits driving their post tax cost down. The decision should normally be taken in consultation with your financial consultant. As a thumb rule (not applicable in all cases) however, it will normally make sense even to prepay the home loans as long as the prepayment charges do not exceed 2%. There are two big exceptions to this thumb rule.

Where the interest rates on the home loan are lower than the current ruling rate (for example where you had entered into a fixed rate contract earlier).

If principal repayment of the home loan increases the amount of deduction under section 80C (this will happen if you are not fully utilising the Rs 1,00,000 limit of deduction under this section through other modes of investment such as Life insurance premiums, contribution to provident funds, etc)