Question 1

How does loan prepayment save interest?

Accepted Answer

When you make a prepayment, the principal balance reduces immediately. Since interest is calculated on the outstanding principal, a lower balance means less interest charged each month, resulting in significant savings over the loan tenure.

Question 2

Is it better to reduce EMI or reduce tenure after prepayment?

Accepted Answer

Reducing tenure saves more interest overall because you pay off the loan faster. Reducing EMI provides immediate monthly cash flow relief but costs more in total interest. This calculator shows the tenure reduction scenario.

Question 3

Are there penalties for prepaying a loan?

Accepted Answer

For floating rate home loans in India, RBI mandates no prepayment penalty. Fixed rate loans and personal loans may have prepayment charges of 2-5%. Check your loan agreement for specific terms.

Financial Calculators