Calculate savings from loan prepayment
Prepayment means paying extra toward your loan principal beyond regular EMIs. It directly reduces outstanding principal, thereby reducing total interest payable. Even small prepayments can save lakhs over the loan tenure.
Reducing tenure saves more interest (you pay off faster at higher EMI). Reducing EMI provides immediate cash flow relief but costs more long-term. If finances allow, choose tenure reduction for maximum savings.
For floating rate loans in India, banks can't charge prepayment penalties (RBI regulation). Fixed rate loans may have 2-4% penalty. NBFCs may charge penalties regardless. Always check your loan agreement.
Prepay early in the loan when interest component is highest—prepayments in the first 5 years of a 20-year loan have maximum impact. Use bonuses, tax refunds, or windfalls for prepayment.
Balance prepayment with other financial goals. Maintain 6 months emergency fund, maximize tax-beneficial investments first, then prepay. Even 1-2 extra EMIs yearly significantly reduce tenure and interest.
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