Priya gets a bonus and puts ₹2,00,000 towards her home loan. The bank then asks a question she was not expecting: "Do you want to reduce your EMI, or reduce your tenure?" Both sound fine. One saves her ₹6.9 lakh; the other saves ₹2 lakh.
This guide explains prepayment in four steps: what it is, why it saves money, a worked example of both choices, and a short summary.
What a prepayment is
A prepayment (or part-payment) is money you pay towards a loan on top of your normal EMI. All of it goes straight to the principal - the loan itself - so you owe less from that day on.
After a prepayment the bank gives you a choice:
| Option | Your EMI | Your loan ends |
|---|---|---|
| A · Reduce the tenure | Stays the same | Earlier |
| B · Reduce the EMI | Goes down | On the original date |
Why a smaller loan saves so much
Every EMI is split into interest on what you still owe and principal. Interest = what you owe × rate ÷ 12. Owe less, and less of each EMI goes to interest - so more of it pays off the loan.
Priya's loan: ₹30,00,000 at 8.5% for 20 years, EMI ₹26,035. After one year she owes ₹29,40,293; her ₹2 lakh prepayment takes it to ₹27,40,293. Her very next EMI splits like this:
| Month 13 EMI of ₹26,035 | Without prepayment | With ₹2 lakh prepaid |
|---|---|---|
| She owes | ₹29,40,293 | ₹27,40,293 |
| Interest (owed × 8.5% ÷ 12) | ₹20,827 | ₹19,410 |
| Principal (EMI − interest) | ₹5,208 | ₹6,624 |
Same EMI, but ₹1,416 more of it now repays the loan. Next month she owes even less, so the interest is smaller again - the gap grows by itself:
| She owes after… | Without prepayment | With ₹2 lakh prepaid | Gap |
|---|---|---|---|
| the prepayment | ₹29,40,293 | ₹27,40,293 | ₹2,00,000 |
| 5 more years | ₹25,52,625 | ₹22,47,165 | ₹3,05,460 |
| 10 more years | ₹19,60,539 | ₹14,94,009 | ₹4,66,530 |
Option A vs option B, in rupees
| ₹30 lakh, 8.5%, 20 years, ₹2 lakh prepaid after year 1 | No prepayment | A · Same EMI | B · Lower EMI |
|---|---|---|---|
| EMI | ₹26,035 | ₹26,035 | ₹24,264 |
| Loan ends after | 240 months | 206 months | 240 months |
| Total interest | ₹32,48,327 | ₹25,60,812 | ₹30,44,564 |
| Interest saved | - | ₹6,87,516 | ₹2,03,763 |
With option A the balance reaches zero 34 months early - those last 34 EMIs simply never happen, and that is where most of the ₹6.9 lakh comes from. With option B the bank keeps the 20-year end date and lowers the EMI by ₹1,771, so she still pays for all 240 months and saves much less.
Remember: Option A (keep the EMI, shorten the loan) saves the most. Choose option B only if you need the lower monthly payment.
When you prepay matters most
Because early EMIs are mostly interest, the same ₹2 lakh saves far more early in the loan (option A each time):
| ₹2 lakh prepaid after… | Months saved | Interest saved |
|---|---|---|
| 1 year | 34 | ₹6,87,516 |
| 5 years | 25 | ₹4,53,562 |
| 10 years | 16 | ₹2,40,758 |
| 15 years | 11 | ₹94,448 |
Small, regular prepayments add up
| On the same loan | Loan ends | Interest saved |
|---|---|---|
| ₹2,000 extra every month | 38 months early | ₹6,13,186 |
| ₹50,000 extra every year | 64 months early | ₹9,90,915 |
You do not need a big bonus. ₹50,000 a year - one annual increment's worth - takes more than five years off a 20-year home loan.
Charges. RBI rules mean banks and NBFCs do not charge a prepayment penalty on floating-rate loans to individuals. Fixed-rate loans, and many car and personal loans, can carry a charge - check your loan agreement before you prepay.
Should you prepay at all?
Prepaying is a guaranteed saving at your loan's interest rate. Before you do it, make sure you have:
- An emergency fund of a few months of expenses in the bank - money paid into a loan is hard to get back.
- Cleared any costlier debt first - credit cards and personal loans charge far more than a home loan.
- Weighed the tax benefit if you use it - home loan interest can be deductible under the old tax regime, which slightly lowers the real cost of keeping the loan.
The short version
A prepayment goes straight to the principal, so every later EMI carries less interest. Keeping the EMI and shortening the tenure saves the most - ₹6.9 lakh and 34 months on a ₹2 lakh prepayment to a ₹30 lakh, 20-year loan, against ₹2 lakh by lowering the EMI. Prepay early: the same amount saves ₹6.9 lakh in year 1 but ₹94,000 in year 15. Floating-rate home loans in India carry no prepayment charge.
Questions people ask
Should I reduce the EMI or the tenure after a prepayment?
Reducing the tenure (keeping the EMI) saves much more interest. On a ₹30 lakh, 8.5%, 20-year loan, ₹2 lakh prepaid after a year saves ₹6.9 lakh that way, against ₹2 lakh by lowering the EMI.
Is it better to prepay early or late in the loan?
Early. Early EMIs are mostly interest, so a prepayment then removes more future interest. ₹2 lakh saves about ₹6.9 lakh in year 1 and about ₹94,000 in year 15 on the same loan.
Are there charges for prepaying a home loan?
Not on floating-rate home loans to individuals - RBI rules stop lenders charging for that. Fixed-rate loans and some other loans may have a charge; check your agreement.
Is a small monthly prepayment worth it?
Yes. ₹2,000 extra every month on a ₹30 lakh, 8.5%, 20-year loan ends it 38 months early and saves about ₹6.1 lakh of interest.
Should I prepay or invest?
Prepaying earns exactly your loan rate with no risk. Investing may earn more or less. Many people keep an emergency fund first, clear costly debt, and then split spare money between the two.
This article is for education, not financial advice. Figures use the standard reducing-balance method; your lender's numbers may differ slightly. Check your loan terms before deciding.
Educational only. This article explains how things work. It is not investment, tax, legal or career advice, and it is not a recommendation to buy or sell anything. What suits you depends on your own situation - check with a qualified adviser before acting on money decisions.