By the Tooliday Team. Last updated 14 November 2026.
Got a bonus or some spare savings and wondering whether to put it towards your loan? Prepaying can save real money, but it is not always the best move. This guide shows the effect with numbers so you can decide for yourself. You can reproduce the EMI part with our EMI Calculator, and the formula is explained in our guide to loan EMI.
The starting point
Take a ₹10,00,000 loan at 9% a year for 5 years. The EMI is ₹20,758.36, and without any prepayment you pay ₹12,45,501 in total, of which ₹2,45,501 is interest.
What a ₹1 lakh prepayment does
Suppose after paying 12 EMIs you still owe about ₹8,34,170. You now pay an extra ₹1,00,000 towards the principal, bringing the balance to about ₹7,34,170, and you keep paying the same EMI of ₹20,758.
Because the interest each month is charged on a smaller balance, more of every EMI goes to principal, and the loan ends sooner. In this example it finishes after about 42 more instalments instead of 48, so you are done about 6 months early. Counting the 12 EMIs already paid, the ₹1 lakh prepayment and the remaining instalments, your total outgo is about ₹12,05,431. That is roughly ₹40,000 less than the ₹12,45,501 you would have paid.
| No prepayment | ₹1 lakh after 12 EMIs | |
|---|---|---|
| Loan ends after | 60 months | about 54 months |
| Total paid | ₹12,45,501 | about ₹12,05,431 |
| Interest saved | – | about ₹40,000 |
These figures assume the lender keeps your EMI the same and shortens the tenure. Some lenders instead lower the EMI. Both options save interest, but shortening the tenure usually saves more.
Why earlier is better
Early in a loan most of each EMI is interest, so a prepayment at that stage removes principal that would have kept earning interest for years. The same ₹1 lakh paid in the last year saves very little, because little interest remains to be saved.
Check before you prepay
- Prepayment charges. Some loans, especially fixed-rate ones, charge a fee. Read your loan agreement or ask the lender.
- Minimum prepayment amount. Some lenders set a minimum, such as one EMI.
- Your emergency fund. Do not empty it to repay a loan. You can reduce a loan later, but it is hard to borrow cheaply in an emergency.
- Higher-rate debt first. If you also have a credit card balance or personal loan at a higher rate, repaying that usually saves more.
- Other uses of the money. Compare the interest rate on your loan with what your savings or investments can reasonably earn after tax. Investment returns are never guaranteed, while the interest you avoid on a loan is certain.
- Tax effects. Some loans, such as home loans, may carry tax benefits on interest. Check current rules with a tax professional.
This article is general information, not financial advice. Terms differ between lenders, so confirm the details in your loan agreement.