Is there a prepayment penalty on loans in India?

Per RBI guidelines, there is no prepayment penalty on floating-rate home loans and loans against property extended to individual borrowers. For fixed-rate loans, prepayment charges typically range from 2% to 5% of the outstanding amount. For personal loans, most banks charge 3% to 5% prepayment penalty. Since October 2022, no prepayment penalty applies to any floating-rate loan taken by individual borrowers.

Should I prepay my home loan or invest the money?

The decision depends on the loan rate versus expected investment return. If your home loan is at 8.5% and you can earn 12%+ through long-term equity investing, investing may be better. But if your loan is above 9% and you are risk-averse, prepaying gives a guaranteed 9% return (by saving interest). Consider: prepayment after exhausting Section 80C and 24(b) deductions may lose tax benefits, so factor that in.

What is the difference between lump sum and monthly extra prepayment?

A lump sum prepayment (one-time large payment) instantly reduces the principal by a significant amount, providing an immediate reduction in total interest. Monthly extra payments (consistent additional amount each month) gradually reduce the principal and can save substantial interest over the loan term. Monthly prepayments are easier for most borrowers to manage. Both strategies work well.

How much can I save by prepaying my home loan early?

For a Rs 30 lakh home loan at 8.5% for 20 years, paying an extra Rs 5,000 per month saves approximately Rs 11.8 lakh in interest and reduces the tenure from 20 years to about 13 years. A one-time lump sum prepayment of Rs 2 lakh in year 3 saves approximately Rs 3.5 lakh in interest. The prepayment calculator above shows exact savings for your specific loan.

When is the best time to prepay a loan?

The best time to prepay is early in the loan term because interest is highest in the early years. In the first 5 years of a 20-year loan at 8.5%, approximately 59% of each EMI is interest. A prepayment in year 3 saves more interest than the same amount prepaid in year 15. After the midpoint of the loan term, the benefit of prepayment decreases significantly because most interest has already been paid.

Does prepaying reduce EMI or loan tenure?

The standard approach (and the one shown in this calculator) is that prepayment reduces the loan tenure while keeping the EMI constant. The outstanding principal decreases, so fewer EMIs are needed to pay off the loan. Alternatively, some lenders allow recalculating the EMI for the reduced principal, which lowers the monthly payment. This calculator uses the tenure-reduction model, which saves more total interest.

Can I prepay only the principal and not the interest?

Yes. When you make a prepayment, the full amount goes toward reducing the outstanding principal. Since interest is calculated on the remaining balance, a lower principal automatically means less interest in subsequent months. You are not paying the interest portion early: the interest for each month is calculated based on the outstanding balance that month.

How does partial prepayment work for a home loan?

Partial prepayment means you pay a portion of the outstanding principal (usually a minimum of Rs 25,000 to Rs 1 lakh depending on the lender) before the scheduled EMI. The payment goes directly to the principal. After the prepayment, the bank recalculates the remaining amortization schedule. For floating-rate loans, there is no prepayment charge. For fixed-rate loans, a penalty may apply.

Is it better to prepay a personal loan or a home loan first?

Prioritize the loan with the higher interest rate. Personal loans typically have rates of 12-24%, while home loans are 8-10%. Paying off a personal loan first saves more in interest cost per rupee. However, if the home loan has a much larger outstanding balance, even a small percentage saving can be a large absolute amount. Use this calculator to compare the interest saved on each type of loan.

What are the tax implications of prepaying a home loan?

Prepaying a home loan reduces the outstanding principal, which reduces the interest that you pay. Since the Section 24(b) deduction allows up to Rs 2 lakh for home loan interest, reducing interest below that limit may reduce your tax benefit. The principal repayment deduction under Section 80C is also reduced. Under the new tax regime, this is not a concern since no deductions are available.

How does loan prepayment affect the amortization schedule?

After a prepayment, the amortization schedule shifts forward. The outstanding balance drops immediately, so future EMI payments go more toward principal than interest. The loan ends earlier than the original term. The prepaid loan schedule in this calculator shows the revised amortization side by side with the original schedule.

Loan Prepayment Calculator: Prepayment Savings & EMI Reducer | Fermor

What Is Loan Prepayment?

Loan prepayment is the payment of an additional amount over the scheduled EMI, which directly reduces the outstanding principal, resulting in lower total interest and a shorter loan tenure.

When you take a loan, the EMI covers two components: principal repayment and interest on the outstanding balance. The interest portion is recalculated each month on the remaining principal. By making an extra payment, you reduce the principal faster, which means less interest accrues in subsequent months. This compounding effect is why even modest prepayments early in the loan term produce significant savings.

Per RBI guidelines, floating-rate home loans carry no prepayment penalty, making it a zero-cost strategy to reduce your debt burden. The savings can be substantial: on a Rs 30 lakh loan at 8.5% for 20 years, adding Rs 5,000 per month saves over Rs 11.8 lakh in interest and cuts the loan term by roughly 7 years.

Benefits of Loan Prepayment

Prepaying a loan generates three measurable benefits that compound over the remaining term. The table below shows how prepaying at different stages of a Rs 30 lakh, 8.5%, 20-year loan affects total interest and tenure.

Prepayment impact on a Rs 30 lakh loan at 8.5% for 20 years. Interest savings over the full original term.
Prepayment Scenario	Interest Saved	Tenure Reduced	New Tenure
Rs 5,000/mo from year 1	Rs 11.8 lakh	7 yr 2 mo	12 yr 10 mo
Rs 10,000/mo from year 1	Rs 16.2 lakh	10 yr 6 mo	9 yr 6 mo
Rs 2 lakh lump sum in year 3	Rs 3.5 lakh	1 yr 8 mo	18 yr 4 mo
Rs 5 lakh lump sum in year 3	Rs 7.8 lakh	3 yr 10 mo	16 yr 2 mo
Rs 5 lakh lump sum in year 10	Rs 3.1 lakh	1 yr 6 mo	18 yr 6 mo

Three benefits are clear from the data: lower total interest cost, faster loan payoff, and the ability to redirect the freed-up EMI toward investments. The earlier and larger the prepayment, the greater the impact. A Rs 5 lakh lump sum in year 3 saves more than twice what the same amount saves in year 10.

Prepayment vs Investment

The decision to prepay or invest depends on the loan rate versus expected investment return. Prepaying a loan at 9% is equivalent to earning a guaranteed, tax-free 9% return on that money. Investing the same amount in equity markets with a 12% expected CAGR generates a higher nominal return but comes with market risk.

Prepayment vs investment comparison scenarios for a Rs 30 lakh, 8.5%, 20-year loan.
Strategy	Net Benefit (15 yr)	Risk Level	Liquidity
Prepay Rs 5,000/mo	Rs 11.8 lakh interest saved	None (guaranteed)	Lost (in the loan)
Invest Rs 5,000/mo in equity at 12%	Rs 23.6 lakh	Moderate to high	Full (can redeem)
Invest Rs 5,000/mo in debt at 7.5%	Rs 14.2 lakh	Low	Full (can redeem)
50% prepay + 50% equity invest	Rs 17.7 lakh	Low to moderate	Partial

For borrowers who have exhausted Section 80C and 24(b) deductions, prepayment has a tax disadvantage since less interest means a lower 24(b) deduction. Under the new tax regime, this is irrelevant. The general rule: if the loan rate exceeds 9% and you are risk-averse, prepay. If the loan is below 8% and you have a long investment horizon, invest the surplus in equity markets for potentially higher post-tax returns.

How to Use This Loan Prepayment Calculator

Enter loan details: Input your loan amount, interest rate, original tenure, and which year of the loan you are currently in. The calculator uses the current year to compute the remaining balance and the correct remaining tenure.
Choose prepayment mode: Select Monthly Extra to add a fixed amount to each EMI, or Lump Sum for a one-time large payment. The tabs switch instantly so you can compare strategies.
Set prepayment amount: For monthly mode, enter the extra amount you can afford each month. For lump sum mode, set the total amount and the year you plan to make the payment.
Review savings and compare: The result panel shows interest saved, tenure reduction, and a side-by-side comparison of original vs prepaid loan. Expand the amortization section for a year-by-year breakdown.

Frequently Asked Questions

Every prepayment reduces the outstanding principal, so less interest is calculated on the remaining balance. Since interest is calculated on the reducing balance, even a small extra payment early in the loan term saves significantly more interest than the same payment made later. This is because early prepayments stop interest from compounding on that amount for the remaining tenure.

Disclaimer: All calculations on this page are indicative only and based on the inputs provided. Interest savings, tenure reductions, and amortization figures are mathematical approximations and may differ from actual bank calculations due to rounding, processing fees, GST on charges, prepayment penalty policies, and lender-specific amortization methods. Interest rates shown are indicative as of June 2026 and subject to change. Tax benefit information is based on the Income Tax Act provisions and is for general awareness only. This tool is for educational and planning purposes and does not constitute financial or legal advice. Consult a SEBI-registered investment adviser or a qualified CA before making financial decisions.