How a part-prepayment works
Every EMI is split into interest (on the outstanding balance) and principal. A prepayment goes entirely to principal, so the balance falls immediately and every later month's interest is calculated on a smaller amount. The earlier you prepay, the more interest you avoid.
Reduce tenure vs reduce EMI
- Reduce tenure: you keep paying the same EMI and finish the loan sooner. This usually saves more total interest because the balance is cleared faster.
- Reduce EMI: your loan still ends on the original date but each month costs less. This helps cash flow, but you pay interest for longer.
Many lenders default to one of the two. Ask yours, and choose deliberately.
A worked example (₹50 lakh, 20 years, 8.5% p.a.)
| Extra payment | Time saved | Interest saved |
|---|---|---|
| ₹2,000 more every month | 2y 1m | ₹6,69,292 |
| ₹5,000 more every month | 4y 5m | ₹13,89,250 |
| ₹10,000 more every month | 7y 1m | ₹21,78,721 |
| ₹1,00,000 more every year | 6y 7m | ₹20,55,123 |
Figures assume the extra amount is paid from the first EMI and reduces tenure. They are illustrations, not offers.
Things to check with your lender
- Whether prepayment charges apply. For floating-rate loans to individuals, RBI rules restrict such charges, but confirm for your loan.
- Any minimum prepayment amount or how often you may prepay.
- Whether the benefit is applied as reduced tenure or reduced EMI, and how to change it.
Frequently asked questions
Is it better to reduce tenure or EMI after a prepayment?
Reducing tenure generally saves more total interest. Reducing EMI eases monthly cash flow. The right choice depends on your budget; the calculator lets you compare both.
Do I have to pay a penalty to prepay a home loan?
It depends on the loan type and lender. Check your sanction letter and ask your lender before paying.