How much will prepaying save me?

Four repayment blueprints, compared

A free-form prepayment box tells you what one payment does. It doesn't tell you which habit to adopt. These are the four strategies that actually work, run against the loan above — every figure recomputed from its own amortisation schedule.

Which blueprint suits you?

• One extra EMI a year — the default for most salaried borrowers. Your annual bonus already arrives once a year; this just redirects it. Nothing changes month to month, so nothing can go wrong in a bad month.
• +5% EMI every year — the strongest of the four, and the one that demands the most. It only works if your income actually compounds. Match the step to your real appraisal, not your hoped-for one.
• A fixed monthly top-up — best if your surplus is steady rather than lumpy. Easy to automate, easy to pause.
• A one-off lump sum — the most efficient per rupee, provided it lands early. The same amount in year 2 is worth roughly 6× what it is worth in year 15.

Two rules that apply to all four. Tell the bank to reduce the tenure, not the EMI — reducing the EMI throws away most of the benefit. And keep six months of expenses in reserve before prepaying anything: a prepayment cannot be un-made, and a loan you cannot service is a far worse problem than interest you could have saved.

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.

Related calculators & reading

• Prepayment: reduce EMI or reduce tenure?
• 7 ways to reduce your home loan EMI
• Prepay vs invest
• Home loan EMI calculator