How Loan Prepayment Works
Every EMI first pays the interest due on your outstanding loan, and only the rest reduces the principal. In the early years, most of your EMI goes to interest.
A prepayment goes straight to the principal. From the next month onwards, interest is calculated on a smaller balance, so more of each EMI reduces your loan. If you keep the same EMI, the loan ends years earlier.
How to Use This Loan Prepayment Calculator
- Outstanding loan: the principal you still owe (check your loan statement).
- Interest rate and remaining tenure.
- One-time prepayment now: a lump sum such as a bonus.
- Extra prepayment every year: an amount you can add at the end of each year.
The calculator keeps your EMI the same and shows the interest saved, the new tenure and how many years you cut. The table above compares your balance with and without prepayment.
Example: ₹2 Lakh Prepayment on a Home Loan
₹30 lakh home loan at 8.5% for 20 years. EMI: ₹26,035. Total interest without prepayment: ₹32,48,327.
One ₹2 lakh payment saves more than three and a half times its own value in interest.
How Much a One-Time Prepayment Saves
Same ₹30 lakh loan at 8.5% for 20 years, with the EMI unchanged:
| Prepay today | Tenure cut by | Interest saved |
|---|---|---|
| ₹1,00,000 | 1 year 7 months | ₹4,09,200 |
| ₹2,00,000 | 3 years | ₹7,56,579 |
| ₹5,00,000 | 6 years 6 months | ₹15,43,415 |
The Power of Yearly Prepayments
Small regular prepayments add up to big savings. On the same loan:
| Prepay every year | New tenure | Interest saved |
|---|---|---|
| ₹50,000 | 14 years 8 months | ₹9,90,915 |
| ₹1,00,000 | 11 years 9 months | ₹14,84,494 |
Prepay Early: Timing Matters
The same ₹2 lakh saves very different amounts depending on when you pay it:
| When you prepay ₹2 lakh | Interest saved |
|---|---|
| At the start of the loan | ₹7,56,579 |
| After 10 years (₹21 lakh left, 10 years to go) | ₹2,40,758 |
Early prepayments save more because they remove interest for many more years.
Reduce Tenure or Reduce EMI?
After a prepayment, banks usually let you choose:
- Reduce tenure, same EMI: saves the most interest. This calculator uses this option.
- Reduce EMI, same tenure: lowers your monthly outflow but saves less interest.
Choose a lower tenure if your budget is comfortable. Choose a lower EMI if you need breathing room every month.
Should You Prepay or Invest?
Prepaying a loan gives a guaranteed return equal to your loan rate. Investing can earn more but comes with risk.
- Prepay high-interest loans like personal loans and credit card debt first.
- For home loans, many people do both: keep SIPs running and prepay with bonuses.
- Build an emergency fund first, so you never need a new loan after prepaying.
- Old regime taxpayers get a deduction on home loan interest (up to ₹2 lakh for a self-occupied home), which lowers the effective cost of the loan.
Prepayment Charges and RBI Rules
As per RBI rules, banks cannot charge a prepayment or foreclosure penalty on floating-rate loans taken by individuals for non-business purposes, which covers most home loans. Personal loans and fixed-rate loans often carry a prepayment fee, so check your loan agreement first.
Frequently Asked Questions
Is it better to prepay a home loan or invest?
It depends on your loan rate and risk appetite. Prepaying gives a guaranteed return equal to your loan rate. Many people keep investing through SIPs and use bonuses to prepay.
Should I reduce EMI or tenure after prepaying?
Reducing the tenure saves more interest. Reduce the EMI only if you need a lower monthly payment.
Are there charges for prepaying a home loan?
Banks cannot charge prepayment penalties on floating-rate loans to individuals as per RBI rules. Fixed-rate loans and personal loans may have charges, so check your agreement.
When is the best time to prepay a loan?
As early as possible. In the early years most of your EMI goes to interest, so a prepayment then saves the most.
Does prepayment affect my tax benefits?
Under the old regime, a lower loan balance means less interest and a smaller interest deduction. The interest you save is usually far more than the tax benefit you lose.
How often can I prepay my loan?
Most banks allow part-prepayments any time, sometimes with a minimum amount such as one or more EMIs. Check your bank's rules.