What is the Loan Prepayment?
Prepayment means paying more than your EMI, with the extra going straight to principal. Because interest is charged on the outstanding balance, every rupee of prepayment stops earning interest for the lender for the entire remaining tenure — which is why small, early prepayments have outsized effects.
On floating-rate home loans in India, the RBI prohibits prepayment penalties for individual borrowers, making prepayment effectively a risk-free, tax-free return equal to your loan rate.
Formula & worked example
There is no closed formula; the balance is stepped forward month by month:
Balance = Balance − (EMI + Extra − Interestmonth)
repeat until Balance = 0
Worked example: ₹30,00,000 at 8.7% for 20 years gives an EMI of about ₹26,416. Adding just ₹5,000 a month closes the loan in roughly 13.7 years instead of 20 and saves around ₹12.1 lakh in interest — for ₹60,000 a year you would barely notice.
How to use this loan prepayment calculator
- Enter your current outstanding, not the original loan amount.
- Use your actual rate and the years remaining.
- Try an extra amount you can genuinely sustain every month — consistency beats one big payment.
- Read the table to compare ₹2,500, ₹5,000, ₹10,000 and ₹20,000 extra side by side.
Smart tips
- Always instruct the bank to reduce tenure, not EMI. Reducing tenure is where the interest saving comes from.
- Prepay early. A prepayment in year 2 of a 20-year loan saves several times what the same amount saves in year 15.
- Use annual bonuses for a lump-sum prepayment — one extra EMI a year typically cuts 3–4 years off a 20-year loan.
- Compare against investing: prepaying an 8.7% loan is a guaranteed 8.7% tax-free return, which beats most debt funds.
- If you claim Section 24 interest deduction, your effective loan rate is lower — factor that in before prepaying aggressively.
Frequently asked questions
Should I reduce EMI or tenure when prepaying?
Reduce tenure. Keeping the EMI the same and shortening the loan captures nearly all of the interest saving; reducing EMI mostly just lowers your monthly outgo.
Is there a penalty for prepaying a home loan?
Not on floating-rate home loans to individuals — the RBI bars it. Fixed-rate loans, and most personal and car loans, may charge 2–5%.
Is it better to prepay the loan or invest the money?
Compare your loan rate with the after-tax return you can reliably earn. Prepaying is a guaranteed, tax-free return; equity might beat it but is not guaranteed.
Does prepayment affect my credit score?
Closing a loan early is neutral to mildly positive. Your score benefits most from consistent on-time payments and low credit utilisation.
How much does one extra EMI a year save?
On a 20-year home loan, paying 13 EMIs a year instead of 12 typically closes the loan 3–4 years early and saves 15–20% of total interest.
Want the theory behind the numbers? Read our prepayment guides on the Money Blog.
Written by Gurjeet Singh, Sharpen Solutions. Last reviewed 30 Sep 2026. How we check these numbers.