How often should you prepay your loan?
Weighing a prepayment habit against other uses for the same money.
Deciding howto apply a prepayment — reducing tenure or reducing EMI — is only half the question. The other half is when, and how often: whether to make one large prepayment as soon as you can, spread smaller ones throughout the loan, or skip prepaying altogether in favour of something else. Timing changes how much a given prepayment is actually worth.
A prepayment is a guaranteed return
Every rupee you prepay is a rupee that stops accruing interest at your loan’s rate, for however long it would otherwise have remained outstanding. That makes a prepayment mathematically equivalent to an investment guaranteed to return your loan’s interest rate, compounding for the remaining tenure — with no market risk attached, since the saving is locked in the moment you make the payment.
Why early prepayments are worth so much more
A ₹20,00,000 loan at 9% for 15 years, using the real computeEmi and computeTenureForEmi formulas: a ₹2,00,000 lump-sum prepayment made after year 1 saves ₹4,26,278 in total interest over the life of the loan. The identical ₹2,00,000 prepayment made after year 9 instead saves only ₹1,23,704— less than a third as much, for the exact same lump sum, purely because it had far fewer remaining years left to stop accruing interest on.
Compare reducing your tenure vs reducing your EMI on a lump-sum prepayment.
Weighing prepayment against other uses for the money
Since a prepayment’s guaranteed return equals your loan’s rate, the honest comparison is against what else that money could realistically do. Against a fixed deposit earning less than your loan rate, prepaying wins outright — there’s no reason to earn a lower guaranteed return elsewhere while paying a higher guaranteed rate on debt. Against equity investing with a long horizon and a realistic expectation of outpacing your loan rate, it’s a genuine trade-off between a guaranteed saving and an uncertain, potentially higher return.
An emergency fund should come before any prepayment, regardless of the rate math — a prepayment reduces your loan balance, not your liquidity, and you can’t easily pull it back out if an emergency hits. Once that’s covered, the size and frequency of a prepayment habit comes down to how much guaranteed, risk-free saving you want locked in versus how much you’d rather keep flexible or growing elsewhere.
All figures are indicative and for educational purposes only — not financial advice.
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