Prepay Your Loan:
Reduce EMI or Reduce Tenure?

You've come into some extra money and you decide to put ₹1 lakh toward your personal loan. Your bank gives you a choice: reduce your monthly EMI amount, or keep the same EMI and reduce the total number of months left on your loan.

Most banks default to reducing the tenure. Most borrowers, when they ask to change it, ask for the lower EMI instead. The lower EMI option is almost always the worse financial choice.

Why reducing tenure saves you more

Interest on a loan is calculated on the outstanding principal. When you prepay ₹1 lakh, you reduce the principal by ₹1 lakh. Now, how quickly you pay off that remaining principal determines how much interest accrues on it.

If you reduce the EMI: your monthly payment goes down, but you're still paying interest on the remaining principal for the original number of months. The benefit is only the interest on the ₹1 lakh you prepaid.

If you reduce the tenure: you're keeping the same payment pressure going, which pays off the principal faster. You eliminate future interest payments entirely, not just reduce them.

The numbers on a real loan

Let's take a ₹10 lakh personal loan at 15% per annum with 48 months remaining. You make a ₹1 lakh prepayment today.

Option	New EMI	Remaining Tenure	Future Interest	Interest Saved
No prepayment	₹27,800	48 months	₹3,34,400	—
Reduce tenure	₹27,800	40 months	₹2,62,400	₹72,000
Reduce EMI	₹25,000	48 months	₹3,00,000	₹34,400

Reducing the tenure saves you ₹72,000. Reducing the EMI saves you ₹34,400. On the same ₹1 lakh prepayment, reducing tenure saves you more than twice as much.

The gap gets larger with higher interest rates and longer remaining tenures.

When reducing the EMI might make sense

The case for reducing EMI isn't mathematical. It's about cash flow.

• Your income has dropped and the current EMI is straining your monthly budget. If you're genuinely struggling to make the payment, a lower EMI gives you breathing room.
• You're expecting a major expense in the next few months. A lower EMI keeps more cash available for upcoming costs like a medical procedure, a school fee, or a home repair.
• The difference in EMI is large enough to meaningfully invest. If the reduced EMI frees up ₹3,000 a month and you'd actually invest that in a mutual fund consistently, the return might offset the extra interest cost. This is a stretch for most people though, since the math rarely works out in favour of this reasoning.

If none of these apply to you and your finances are stable, reducing the tenure is the right call every time.

The timing question: when to prepay

Interest on a personal loan is front-loaded. In the early months of your loan, most of your EMI goes toward interest and very little toward principal. By the last few months, it's mostly principal repayment.

This means prepayments are most valuable early in the loan. A ₹1 lakh prepayment in month 3 saves far more than the same ₹1 lakh prepayment in month 40, because in month 3, you're eliminating interest that would have been charged over many more future months.

Check prepayment charges first

Before prepaying, find out if your loan has a prepayment charge. Most personal loans in India have a charge of 2 to 4% on the prepaid amount, applicable after the first 6 to 12 months. If you're prepaying ₹1 lakh and the charge is 3%, you're paying ₹3,000 just to make the prepayment.

Factor this into your calculation. If the interest saved by prepaying is ₹15,000 but the prepayment fee is ₹3,000, your net saving is ₹12,000. Still worth doing. But if the fee is ₹8,000 and the interest saving is only ₹9,000, the math is less clear.

RBI has banned prepayment charges on floating rate personal loans. If your loan is on a floating rate and your bank is charging a prepayment fee, they're not supposed to do that.