Should You Prepay Your Loan? A Practical Guide
Prepaying means paying more than your regular EMI, either as a one-time lump sum or a small extra amount every month. Because the extra money goes straight to principal, you stop paying interest on it for the rest of the loan. On long loans the savings can be surprisingly large.
Reduce tenure or reduce EMI?
After a lump-sum prepayment, most lenders let you choose between two options:
- Keep the EMI, reduce the tenure. You keep paying the same amount but finish sooner. This almost always saves the most interest.
- Keep the tenure, reduce the EMI. Your monthly payment drops, which eases cash flow, but the interest saving is smaller.
Switch between the two options above to see the difference for your own loan.
Why timing matters
Interest is charged on the outstanding balance, and the balance is highest early in the loan. A prepayment made in year two removes principal that would otherwise have attracted interest for many years. The same amount paid in the final years saves much less. If you have a choice, earlier is better.
Small monthly extras add up
You don't need a big bonus to make a difference. Adding a modest amount to every EMI can shorten a long loan by years. Try entering a small figure in "Extra every month" and look at the time saved.
When prepaying might not be the best move
- If you don't yet have an emergency fund, build that first.
- If you carry higher-interest debt such as credit cards, clear that before prepaying a cheaper loan.
- If your lender charges a prepayment penalty, compare the penalty with the interest saved.
- If your loan interest gives a tax benefit, factor in the benefit you might lose.