Prepaying your loan before the scheduled tenure ends can save you a substantial amount in interest. Yet many borrowers never consider this option. Here is why you should.
The biggest benefit of prepayment is reducing total interest. Even partial prepayments of one or two EMIs per year can shave months off your loan and save lakhs in interest.
Extra payments go directly toward reducing your principal balance. Since interest is calculated on the outstanding principal, a lower principal means less interest charged each month going forward.
Full prepayment closes the loan entirely. Partial prepayment reduces the principal while the loan continues with either reduced EMI or reduced tenure. Both options save money.
Some lenders charge prepayment penalties of 2-5 percent on the prepaid amount. Floating rate loans typically have no prepayment charges for individual borrowers as per RBI guidelines.
Prepayment is most effective in the early years of a loan when interest constitutes a larger portion of each EMI. As the loan matures, the benefit decreases since most payments already go toward principal.
If you receive a bonus, inheritance, or windfall, consider directing it toward loan prepayment. The guaranteed return from saved interest often beats other investment options.