Which Loan Should I Pay First With My Bonuses?

Highlight: Spending and investing is real fun but using the amount to repay debts with your bonus, is double the fun. But if you need more money after spending your appraisal or performance bonus, Fibe is here to take care of it.

Diwali season is here, and so is the customary Diwali bonus.  Every year, employees wait eagerly for their bonuses during the festive times because this extra money can be used in multiple ways, making their lives easier. In some homes, a new fridge would be bought. In others, an installment of the home loan would be made and some would invest the money for future use. While we all are familiar with bonuses and are consequently very excited about them, what does a bonus actually mean? 

A bonus is a payment usually made to employees in addition to their base salary as part of their wage. The base salary of an employee is usually a fixed amount per month. Bonus payments are increments on these payments. They more often than not vary depending on discerned criteria, such as the annual turnover, or the net number of extra customers amassed, or the recent value of the stock of a public company. 

Therefore, bonus payments can act as incentives for managers to attract interest towards long-term goals for their companies’ success. 

In India, a minimum bonus of 8.33% is payable by every industry and establishment under section 10 of the Payment Of Bonus Act, 1965. The maximum bonus, including a productivity-linked bonus that can be paid in any accounting year, shall not exceed 20% of the salary/wage of an employee under section 31 A of the Act. 

Now, since we are done with the technical jargon of what a bonus is, here is the real question. 

How exactly do you spend it? Should you splurge on it on account of the festive season? Or should you invest it somewhere? 

According to us, one of the best ways to spend your bonus is to use it for the repayment of the loans you took. This helps in taking off the brunt that monthly installments make on your finances. 

But which loans to pay first?

Best use of bonus: To pay off a high-interest loan

In most cases what people tend to do is pay off the loans with the higher amount of EMI first. But this is the wrong approach. 

Interest that is double-digits on a loan or mortgage can be very overwhelming to bear, especially if you have been trying to do away with it for a long time. This is the reason you should use your bonus at this time to repay any high-interest debts before shopping for other luxuries. 

Experts suggest that an employee’s prerogative must be to do away with the debt that demands an interest rate more substantial than what you could earn on that money elsewhere. The plus point is that paying off debt can also ensure peace of mind and help you manage your finances for other expenditures.

An example to explain the repayment of loan

Still, confused with which loans to pay first? 

Let us explain with an example. 

Say at present you have three kinds of loans. An INR 5 Lakh car loan, an INR 3 personal loan, and an INR 2 lakh credit card loan. Now common sense would dictate that you should repay the loan with the highest EMI first. This is a faulty approach.

However, the right approach would be to use a concept called laundering up of loans. In this, you repay the loans based on the rates of interest. The highest one gets relayed first. Going by our example, the credit card loan should be paid first in this scenario. This is because these loans tend to have a higher rate of interest, about forty percent. You can then gradually go down accordingly. You can also pay parts of the personal loan with the remaining amount. 

Consequently, you can also use the remaining money to set up an emergency fund. Because the reason why a person takes a credit card or personal loan is that they do not have an emergency fund. 

Conclusion

Bonuses are great ways to bring back the financial balance into your life by clearing your debts. One should take full advantage of them and use them judiciously instead of spending them on frilly items in the wake of festivities. 
While we are on the subject of loans, one must start to wonder where to avail them in the first place. Fibe is here to rescue. One of India’s largest instant personal loans and salary advance platforms, Fibe helps you avail of loans at a decent rate of interest without having to waste time on technicalities.

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