I am planning for interest rate arbitrage to pay off my education loan in India at 11.25% interest rate using a personal loan at 3.9% interest rate from an European country where I work drawing monthly income.
I know that there is EUR-INR Foreign exchange risk. But I am saving atleast 7% by paying off high interest rate loan back home.
I have below two options:
Make monthly payments as much as possible through foreign exchange transfer towards education loan in India. This will reduce foreign exchange risk due to averaging over few years, but the high interest rate @ 11.25% will be compounding.
Close this education loan in India using personal loan at 3.9% interest rate. I will try to close this low interest personal loan asap as there is no prepayment penalty. By this way, I have advantage of low interest rate but exposed to foreign exchange risk by transferring huge amount of money to India with current low conversion rate.
Please provide your valuable insights.