Prepayment
Full form: Loan Prepayment
Loans & CreditPrepayment is paying a portion of a loan before the scheduled due date. For floating-rate home loans, RBI prohibits prepayment penalties since 2012. Prepaying early saves maximum interest.
In detail
When prepaying: choose to reduce tenure (keeps EMI same) rather than reducing EMI (keeps tenure same). Reducing tenure saves significantly more total interest. Rs 1L prepaid in year 2 of a 20-year loan at 8.5% saves approximately Rs 2.5L in total interest.
Formula
Interest saved from prepayment: recalculate amortization with and without prepayment
Real-life example
🇮🇳 India example
Sanjay gets Rs 5L bonus. Home loan outstanding Rs 40L at 8.5%, 15 years. Prepaying Rs 5L saves approximately Rs 12L in total interest (reduce tenure option) vs investing Rs 5L in FD at 7.2% taxable = Rs 1.08L post-tax over 15 years. Prepaying wins clearly.
Frequently asked questions
Prepay loan or invest the surplus? ▼
Loan rate (8.5%) > FD post-tax return (5%): prepay loan. Loan rate (8.5%) < equity expected return (12%): invest in equity. For personal loan or credit card (14%+): always prepay before investing.