Smart Loan Prepayment Strategies
💡 Key Takeaway
Prepaying your loan can save lakhs in interest, but timing and strategy matter. Focus on high-interest loans first, prepay early in the loan tenure, and choose EMI reduction over tenure reduction for maximum savings.
What is Loan Prepayment?
Loan prepayment means paying extra money towards your loan principal before the scheduled due date. This reduces your outstanding principal, which in turn reduces the interest you'll pay over the loan tenure.
Example: Power of Prepayment
When Should You Prepay?
Prepay When:
- You have surplus funds (bonus, inheritance)
- Emergency fund is already built (6-12 months)
- Loan interest rate is high (>9%)
- You're in early years of loan (first 5-7 years)
- No better investment opportunity available
Don't Prepay When:
- You don't have emergency fund
- Loan interest rate is low (<7%)
- You're in last 5 years of loan tenure
- Better investment returns available (12%+)
- Prepayment penalty is high (>2%)
Prepayment Strategies
Prioritize High-Interest Loans
If you have multiple loans, prepay in this order:
Prepay Early in Loan Tenure
Maximum interest is paid in the first half of loan tenure. Prepaying early gives maximum benefit.
Choose EMI Reduction Over Tenure Reduction
When you prepay, banks offer two options:
Make Regular Small Prepayments
Instead of waiting for a large amount, prepay small amounts regularly:
Use Windfalls Wisely
Allocate bonuses, tax refunds, or gifts towards loan prepayment:
Prepayment Charges
| Loan Type | Floating Rate | Fixed Rate |
|---|---|---|
| Home Loan | NIL (RBI mandate) | 2-4% of prepaid amount |
| Personal Loan | 2-5% of prepaid amount | 3-6% of prepaid amount |
| Car Loan | 2-4% of prepaid amount | 3-5% of prepaid amount |
Important Note
RBI has mandated that banks cannot charge prepayment penalty on floating rate home loans. However, fixed-rate loans and other loan types may have prepayment charges. Always check your loan agreement before prepaying.
Prepayment vs Investment: What's Better?
The Math
• If loan rate < 7%: Invest in equity
• If loan rate 7-9%: Do both (50-50 split)
Tax Benefits on Home Loan
Before prepaying home loan, consider the tax benefits you're getting:
If you're in 30% tax bracket, ₹2L interest deduction saves ₹60,000 in taxes. Factor this in your prepayment decision.
Calculate Your Prepayment Benefit
Use our prepayment calculator to see how much you can save by prepaying your loan.
Calculate Savings →