Which Loans to Pay Off First in India: Smart Debt Strategy 2026

If you are juggling multiple EMIs, the question is not whether to repay loans early but which loans to pay off first. Many Indian borrowers make the mistake of closing smaller EMIs or emotionally stressful loans, while ignoring high-interest debt that silently drains wealth. In 2026, with interest rates stabilising and RBI focusing on responsible lending, having a clear loan repayment strategy matters more than ever. At Saarathi.ai, we have observed that borrowers who follow a structured payoff order save up to 20-30 percent on total interest over the loan tenure. This guide explains the smartest way to prioritise loans in India, balancing interest cost, tax benefits, credit score impact, and cash flow. Whether you have personal loans, credit card dues, home loans, or business loans, this blog will help you take control of debt with clarity and confidence.

Why Loan Repayment Order Matters

Paying off loans randomly feels productive but often costs more in the long run. The order in which you repay debt affects:

• Total interest paid over time

• Monthly cash flow and financial flexibility

• Credit score and future loan eligibility

• Stress levels and financial confidence

Indian households today typically hold a mix of secured and unsecured loans. According to insights referenced by Reserve Bank of India, unsecured lending has grown faster than secured credit in recent years, making prioritisation essential.

Two Popular Loan Repayment Methods Explained

Before deciding which loans to close first, you need to understand the two most common repayment strategies.

Debt Avalanche Method

This method focuses on interest rate priority. You pay off the loan with the highest interest rate first while paying minimum EMIs on others.

Best for: Saving maximum money on interest
Ideal for: Financially disciplined borrowers

Debt Snowball Method

This approach prioritises smallest outstanding balance first, regardless of interest rate.

Best for: Psychological motivation
Ideal for: Borrowers who need quick wins to stay consistent

At Saarathi.ai, we usually recommend a hybrid approach that combines logic with motivation, especially for first-time borrowers.

Which Loans Should You Pay Off First in India

1. Credit Card Dues and BNPL Loans

Credit cards and Buy Now Pay Later loans carry interest rates of 30-45 percent annually if unpaid.

Why they come first:

• Highest interest cost

• Compounding happens monthly

• Missed payments severely damage credit score

Action tip: Always clear full credit card outstanding, not just minimum due. Use Saarathi AI expert to assess personal loan options if consolidation makes sense.

2. Personal Loans

Personal loans typically charge 11-24 percent interest, depending on credit profile.

Why to prioritise them:

• Unsecured and expensive

• No tax benefits

• Fixed EMIs strain monthly cash flow

At Saarathi.ai, we have seen borrowers reduce EMIs by refinancing personal loans through AI-matched lender offers on our platform.

3. Consumer Durable and Instant App Loans

These include smartphone loans, app-based instant credit, and zero-cost EMI schemes with hidden charges.

Why they matter:

• High processing fees

• Short tenures create EMI clutter

• Often linked to aggressive recovery practices

Closing these early simplifies finances and improves peace of mind.

4. Business Loans Without Tax Optimisation

Business loans are not always bad debt, but poorly structured ones can hurt cash flow.

Prioritise if:

• Interest exceeds business returns

• Loan is not generating revenue

• EMI pressure affects working capital

According to CRISIL data, MSMEs with optimised loan structures show significantly better survival rates.

5. Car Loans

Car loans usually carry 8-12 percent interest.

Why they rank lower:

• Secured loan with moderate interest

• Asset depreciates but cost is manageable

• Prepayment charges may apply

If you plan to sell the car soon, early closure may make sense.

6. Home Loans

Home loans are usually the last to prepay, not the first.

Reasons:

• Lowest interest among retail loans

• Long tenure keeps EMIs affordable

• Section 80C and 24(b) tax benefits

• Inflation reduces real cost over time

Financial experts quoted in Economic Times often suggest investing surplus funds instead of aggressive home loan prepayment, especially in early years.

Loan Payoff Priority Table for Quick Reference

Factors to Consider Before Prepaying Any Loan

Tax Benefits

Home loans and some education loans offer tax deductions. Closing them early may reduce tax efficiency.

Emergency Fund

Never use emergency savings to close loans. Maintain at least 6 months of expenses before aggressive prepayment.

Prepayment Charges

Many lenders charge 2-5 percent foreclosure fees, especially on fixed-rate loans.

Credit Score Impact

Closing unsecured loans improves credit utilisation, but closing your oldest credit account may slightly reduce credit history length.

Smart Strategies to Repay Loans Faster in 2026

• Increase EMI annually as income grows

• Use bonuses and incentives for partial prepayments

• Consolidate high-interest loans into one lower-cost loan

• Track all offers digitally using Saarathi Bazaar dashboard

• Check eligibility instantly via Saarathi AI expert without impacting credit score

FAQs: Which Loans to Pay Off First

Should I close my home loan early or invest instead?
If your investment returns exceed home loan interest, investing may be smarter.

Is it better to prepay personal loan or car loan first?
Personal loans should be prepaid first due to higher interest and no tax benefits.

Does loan prepayment improve credit score?
Yes, especially for unsecured loans, as it improves credit utilisation ratio.

Should I take a new loan to close old loans?
Only if the new loan has significantly lower interest and better terms.

How can I track multiple loan repayments easily?
Using a single dashboard like Saarathi Bazaar helps monitor EMIs, offers, and closures.

Conclusion

Choosing which loans to pay off first is about strategy, not emotion. The smartest order is:

• Close high-interest unsecured debt first

• Protect tax-efficient and low-cost loans

• Maintain liquidity and credit health

At Saarathi.ai, we help borrowers compare, optimise, and close loans with full transparency using AI-driven recommendations. Discover personalised loan options and smarter repayment strategies on Saarathi.ai today.