Why prepaying saves so much
Interest on a loan is charged on the outstanding balance. Any extra payment reduces that balance immediately, so every future month's interest is a little lower, and more of each EMI goes toward principal. If you keep the EMI the same, the loan simply ends earlier. That's why prepaying early in the loan, when the balance is largest, saves the most.
Worked example
Each month: interest = balance × rate/12
balance = balance + interest − EMI − extra
(yearly lump applied every 12th month)Reduce the EMI or the tenure?
After a part-payment, your bank will ask whether to reduce your EMI or your remaining tenure. This calculator shows the reduce tenure option, which saves far more interest. Choose reduce EMI only if you need breathing room in your monthly budget.
Prepay the loan or invest the money?
Compare the loan rate with what you could safely earn after tax:
- Personal loans and credit cards (12–42%): prepay first; no investment reliably beats that.
- Home loans (8–9%): it's closer. Prepaying gives a guaranteed, tax-free return equal to your loan rate. Equity funds may earn more over long periods, with risk. Under the old regime, remember the interest deduction lowers your effective rate.
Many borrowers split the difference: keep their emergency fund and SIPs going, and put bonuses toward the loan.
Frequently asked questions
When is the best time to prepay a loan?
As early as possible. The balance, and therefore the interest, is highest in the early years.
Is there a penalty for prepaying a home loan?
Not on floating-rate home loans taken by individuals. Fixed-rate loans may carry a charge of 2–4% of the amount prepaid.
Does prepayment affect my tax benefit?
Under the old regime, a smaller balance means less interest to deduct, but the interest you save is usually far larger than the tax benefit you lose.