How to save interest by prepaying a loan

Steps

1. Enter the loan amount, the rate and the original tenure in the prepayment calculator.
2. Enter the extra amount you can pay every month, or a one-time lump sum and the EMI number after which you will pay it.
3. Read the interest saved, the time saved and the new loan length.
4. Try a few amounts and keep the one you can keep up without touching your emergency savings.
5. Tell your lender how the extra payment should be applied, so that it reduces the principal.

Extra every month

The loan is ₹10,00,000 at 9% for 20 years. With no extra payment you pay ₹11,59,342 in interest. With ₹2,000 extra a month the loan ends in 12 years 10 months and you save ₹4,73,149. With ₹5,000 extra it ends in 8 years 7 months and you save ₹7,21,616. With ₹10,000 extra it ends in 5 years 8 months and you save ₹8,82,545.

The savings do not grow in a straight line. Each extra rupee reduces the balance that interest is charged on, so the early payments work for longer.

A one-time lump sum

A single ₹2,00,000 paid after 24 EMIs, with nothing extra otherwise, shortens the same loan to 13 years 3 months and saves ₹5,32,499. A lump sum is easiest to manage when you receive a bonus, and it works best early, while the balance and the remaining interest are both large.

Before you prepay

Check for a prepayment charge, which some lenders add, and whether your lender reduces the tenure or the EMI when you prepay. The calculator assumes the EMI stays the same and the loan ends sooner. Keep an emergency fund first, because borrowed money is hard to take back once you have paid it off.