How Loan Prepayment Works: Step-by-Step Math & Tenure Reduction Guide
Prepayment applies directly against the outstanding loan principal. Because future monthly interest is computed on this reduced principal, prepayment creates a compounding interest savings effect.
Key Financial Takeaways
- Prepaying early in the loan tenure delivers the highest financial return.
- Always instruct your lender to reduce tenure rather than reducing EMI for maximum interest savings.
- Floating rate home loans have zero prepayment charges as mandated by RBI.
Calculate Loan Prepayment Savings
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The Multiplier Effect of Early Prepayment
If you make a single ₹2 Lakh prepayment in Year 2 of a ₹40 Lakh, 20-year home loan at 8.5%, that ₹2 Lakh eliminates over ₹5.8 Lakh in future interest and cuts your remaining tenure by 26 months!
Frequently Asked Questions
Is there any limit on how many times I can prepay?
Most banks allow unlimited part-prepayments with minimum amounts like ₹10,000 or 1 EMI value.
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