What is loan prepayment?
Loan prepayment is when you pay extra money toward your loan principal beyond the regular EMI. This reduces your outstanding balance and can significantly decrease the total interest paid over the loan tenure.
Should I reduce tenure or EMI with prepayment?
Reducing tenure saves more interest in the long run, while reducing EMI improves monthly cash flow. If you have other investment opportunities with higher returns, reducing EMI might be better. Otherwise, reducing tenure maximizes interest savings.
Are there prepayment charges?
Most banks don't charge prepayment penalties for floating rate loans. However, fixed-rate loans may have prepayment charges ranging from 2-5% of the prepaid amount. Check with your lender before making prepayments.
When is the best time to make prepayments?
Earlier prepayments save more interest since interest is calculated on the outstanding principal. Making prepayments in the initial years of the loan provides maximum benefit as the interest component is highest during this period.
How much should I prepay?
Prepay amounts you can comfortably spare after maintaining an emergency fund (6-12 months of expenses) and meeting other financial goals. Annual bonuses, tax refunds, or surplus savings are good sources for prepayments.
Can I make partial prepayments?
Yes, most lenders allow partial prepayments. You can make multiple prepayments throughout the loan tenure. Even small regular prepayments can significantly reduce your total interest burden.
What is the minimum prepayment amount?
This varies by lender. Some banks have no minimum limit, while others may require a minimum of ₹5,000 to ₹25,000 for each prepayment transaction. Check your loan agreement for specific details.
Do prepayments affect my credit score?
Prepayments positively impact your credit score as they demonstrate financial discipline and reduce your debt-to-income ratio. Closing a loan early through prepayment shows lenders you're a responsible borrower.