Prepaying Your Loan: When It Makes Sense

Prepayment means putting extra money toward your loan principal ahead of schedule, either as a lump sum or by closing the loan entirely. On a reducing-balance loan it directly cuts the interest you will pay from that point on.

When prepaying is usually a good move

• The loan carries a high rate — most unsecured personal loans qualify.
• You are early in the tenure, when the interest portion of each EMI is largest.
• There is no prepayment penalty, or it is smaller than the interest you would save.
• You still have your emergency fund intact after prepaying.

When to think twice

• Prepaying would drain your emergency savings — a shock could then force a costlier loan.
• The prepayment penalty roughly cancels the interest saved.
• You have another debt at a higher rate; clear that one first.

Reduce the EMI or the tenure?

After a part-prepayment most lenders let you either lower the EMI or shorten the tenure. Shortening the tenure saves more interest overall; lowering the EMI eases monthly cash flow. Pick based on which pressure you feel more.