EMI Increase or Prepayment: Which Saves More Interest?
Summary
Both shorten a loan, but they do it differently. Here is how to compare the two options with real numbers before you commit.
Interest on a reducing-balance loan is charged on the outstanding principal, so anything that pushes the principal down faster saves money. Both a higher EMI and a lump-sum prepayment do that — the difference is timing and flexibility.
Raising the EMI
A permanently higher EMI cuts the tenure and works best when your income has risen and is stable. It is automatic, so there is no discipline problem, but the commitment is fixed for the rest of the loan.
Lump-sum prepayment
A one-time payment from a bonus or maturity amount reduces the principal immediately. You can choose to keep the EMI the same and shorten the tenure, which saves the most interest, or reduce the EMI and keep the tenure.
How to compare in practice
- Run your current loan in the EMI calculator and note the total interest.
- Run it again with the higher EMI amount you can afford, and note the new total interest.
- Run it a third time with the reduced principal after a prepayment.
- Compare the three totals, then check your lender for prepayment charges — floating-rate home loans to individuals generally carry none.
Keep an emergency fund before prepaying. Money used to clear a loan cannot easily be taken back out.
Frequently asked questions
Should I prepay a home loan or invest instead?
Compare the loan interest rate with the return you realistically expect after tax. Prepaying is a guaranteed saving at the loan rate; investing carries risk but may return more.
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