How prepayment saves interest
Each month your interest is charged on the balance you still owe. When you pay extra, the balance falls faster, so less interest is charged every month after that. With your EMI unchanged, the loan finishes sooner. The earlier you prepay, the more you save, because the money works against a larger balance for longer.
Worked example
Tips before you prepay
- Prepay early. A part-payment in year 2 saves far more than the same amount in year 15.
- Keep an emergency fund first. Do not prepay with money you may need within months.
- Compare with investing. If your loan rate is higher than what you can safely earn, prepaying is a sure return.
- Ask for tenure reduction, not just EMI reduction. Cutting the tenure saves more interest.
Frequently asked questions
Are there charges for prepaying a home loan?
For floating-rate home loans taken by individuals, banks cannot charge prepayment penalties. Fixed-rate loans, car loans and personal loans may have charges. Check your loan agreement.
Is it better to reduce EMI or tenure?
Reducing the tenure saves more total interest. Reducing the EMI improves monthly cash flow but saves less.
How much should I prepay?
Many people put aside a bonus, or add 5% to 10% extra to each EMI. Even small extra payments make a large difference over many years.
Does prepayment affect my tax benefit?
Interest you pay falls, so the Section 24(b) deduction on interest also falls. The old regime also allows principal under 80C within the overall limit.
Does this work for car and personal loans?
Yes, the maths is the same. Check for foreclosure charges, which are common on these loans.