How much will prepaying save me?
Add a one-time lump sum prepayment (a bonus, inheritance, or sale proceeds) and see exactly how many months you cut from the loan and how much total interest you save.
The intuition: why early prepayment saves more
In an amortizing loan, interest is calculated on the outstanding balance each month. Early in the loan, most of your EMI goes to interest because the balance is high. As the balance shrinks, less interest accrues. So when you prepay ₹5 lakh in month 12 vs month 60:
- Month 12 prepayment: reduces the high balance, eliminates many years of interest from compounding
- Month 60 prepayment: reduces a smaller balance, eliminates fewer years of interest
The earlier the prepayment, the more dramatic the saving. Sometimes a ₹5 lakh prepayment in year 2 saves more than ₹10 lakh prepayment in year 10.
What "effective return" means
The effective return is the annualized rate of return on your prepayment. If you prepay ₹5 lakh and save ₹15 lakh in interest over the remaining tenure, that's a strong return. Compare it to what you could have earned by investing the ₹5 lakh elsewhere:
- If effective return on prepayment is higher than your expected investment return (after tax), prepay
- If lower, investing is mathematically better
For a deeper analysis of this tradeoff, see the prepay-vs-invest calculator.
What this calculator does not include
- Tax shield on interest — for home loans, you lose some Section 24(b) deduction when you prepay. The savings shown here are pre-tax. Net of tax, savings are usually 70-90% of the gross figure for borrowers in higher slabs.
- Foreclosure charges — for floating-rate retail loans (RBI rule), there are no charges. For fixed-rate or business loans, factor in 2-5% of outstanding.
- Recurring prepayments — this calculator handles one lump sum. Recurring prepayments (every year, every bonus) compound the savings further.