Tarun Birani, founder and CEO of TBNG Capital Advisors, recommended a specific hierarchy for managing home, personal, and car loans during a recent appearance.
Strategic debt management allows individuals to maximize their long-term net worth by balancing interest costs against potential investment returns. This approach prevents borrowers from liquidating high-yield assets to pay off low-interest debt.
Speaking on CNBC TV18’s MF Corner programme, Birani said that investors should keep their home loans and instead direct surplus funds toward investments [1]. Because home loans typically offer lower interest rates compared to other forms of credit, the cost of borrowing is often lower than the potential gains from the market.
In contrast, Birani said that personal loans should be paid off as quickly as possible [1]. These loans generally carry higher interest rates, which can erode a household's monthly disposable income, and overall wealth accumulation.
Regarding vehicle financing, Birani said that individuals should prepay car loans if they have the financial capacity to do so [1]. While not as urgent as personal loans, reducing the principal on a car loan limits the total interest paid over the life of the asset.
This framework suggests that the decision to prepay debt should be based on the relative cost of the loan. By eliminating high-cost debt first and maintaining low-cost leverage, borrowers can maintain liquidity while reducing their liabilities [1].
“Keep a home loan and invest surplus funds.”
This strategy highlights the concept of 'positive leverage,' where a borrower keeps low-interest debt to invest in assets that yield a higher rate of return. By prioritizing the elimination of high-interest personal loans, consumers reduce their financial risk and improve their debt-to-income ratio, while maintaining a home loan allows them to benefit from potential tax advantages and market growth.
