Why prepay a loan?
Every rupee you prepay on a reducing-balance loan stops earning interest for the lender from that very month. On a 20-year home loan, a single prepayment in the early years can save several lakh rupees in interest, because the early years are when the interest component is highest. This calculator shows exactly how much you save with a lump-sum prepayment after N months, an extra fixed amount every month, or both.
Two ways to use a prepayment
- Option A — keep the EMI, reduce the tenure. The loan closes earlier and interest saving is maximum. This is the default most banks apply.
- Option B — keep the tenure, reduce the EMI. Monthly cash flow improves but you save less interest, because the balance is repaid more slowly.
Worked example
Outstanding ₹30,00,000 at 8.75% with 20 years left: EMI ₹26,511 and total interest ₹33.63 lakh. Prepaying ₹5,00,000 after 12 months and adding ₹5,000 to each EMI closes the loan in about 11 years 8 months instead of 20 — a saving of roughly ₹16 lakh in interest. Choosing a lower EMI instead would reduce the instalment to around ₹21,000 while saving a smaller amount.
Rules on prepayment charges
RBI prohibits foreclosure and part-prepayment charges on floating-rate term loans sanctioned to individuals for non-business purposes, which covers almost all home loans. Fixed-rate loans and business loans may attract 2–5% of the prepaid amount; enter the charge to see the net benefit. Some lenders require a minimum prepayment (often one EMI) and limit the number of part payments per year.
Tips
- Prepay as early as possible — the same amount saves far more in year 2 than in year 15.
- Use annual bonuses, maturing FDs or salary increments as a yearly prepayment habit.
- Keep an emergency fund before prepaying; liquidity matters more than a slightly earlier closure.
- Home loan principal prepayment counts towards Section 80C under the old tax regime.
Frequently Asked Questions
Is it better to reduce EMI or tenure after prepayment?
Reducing tenure saves far more interest. Reduce the EMI only if you need monthly cash-flow relief.
Are there charges for prepaying a home loan?
Not on floating-rate loans to individuals, as per RBI guidelines. Fixed-rate and business loans may charge a penalty; check your sanction letter.
When is the best time to prepay?
In the first third of the tenure, when the interest component of the EMI is highest. The later you prepay, the smaller the saving.
Should I prepay or invest the money?
If your expected post-tax investment return is clearly higher than the loan rate, investing can win; otherwise prepayment gives a guaranteed, risk-free saving equal to the loan rate.
Disclaimer: This tool is for general information and estimation only. Tax rates and rules change — verify with official sources or a professional before acting. Read full disclaimer.