Prepayment vs. Higher EMIs – Which is the right strategy for you?

Increasing your EMIs accelerates principal repayment, cutting down interest costs and loan tenure

Two of the most effective strategies to achieve that are prepayment and increasing EMIs. (Source: Pexels)

Written by: Adhil Shetty

3 min readNew DelhiFeb 27, 2025 12:58 PM IST First published on: Feb 27, 2025 at 12:54 PM IST

Home loans are a long-term financial commitment, stretching up to 30 years. Interestingly, homeownership has consistently been among the top three goals for Indians, according to the Aspiration Index, an annual survey of India’s aspirations through the lens of personal finance. While home loans make homeownership more affordable, rising interest rates have made managing this debt increasingly challenging. As a result, borrowers are exploring ways to reduce their loan burden and become debt-free faster. Two of the most effective strategies to achieve that are prepayment and increasing EMIs. While they work differently, both aim to lower your total interest and shorten loan tenure. Let’s break down how each works and which might be better for you.

Strategy 1: Loan Prepayment

Home loan EMIs cover both principal and interest. Prepayment, or making extra payments toward the principal, reduces interest costs and shortens loan tenure. This flexible strategy often uses surplus funds like bonuses, with minimal impact on your regular financial commitments or lifestyle.

Example

Loan details: Rs 50 lakh at 9.40% for 20 years (240 months). The borrower will make annual prepayments of 5% of their loan balance.

Key considerations for prepayment

Prepayments should ideally be done early in the loan’s tenure when interest outgo is the highest.

Check your loan agreement for prepayment fees, particularly if you have a fixed-rate loan.

Prepayments can tie up your surplus funds, limiting your liquidity for investments or emergencies. Compare the savings versus the potential returns you can make before making your decision.

Strategy 2: Higher EMIs

Increasing your EMIs accelerates principal repayment, cutting down interest costs and loan tenure. This strategy involves a disciplined repayment approach that limits reliance on surplus funds.

Example

Loan details: Rs 50 lakh at 9.40% for 20 years (240 months). Borrower hikes EMI by Rs 5,500 one month after repayments begin.

Key considerations

Higher EMIs mean a greater monthly commitment, which could strain your budget if you haven’t planned for them in advance.
This strategy is ideal for those with a stable income and the financial means to commit to higher fixed monthly payments.
It may not be suitable if your income is irregular or financial flexibility is a priority for you.

Which strategy is right for you?

Both strategies serve different needs, so the key is choosing what suits you best. If you have a stable income and can handle a higher monthly commitment, increasing your EMI is a more effective way to save on interest. However, if your income is irregular and you prefer flexibility, prepayment lets you reduce your loan burden whenever you have surplus funds.

An ideal approach here can be a mix of both strategies, but not without analysing the financial impact. As a final word of advice, check for prepayment charges when reviewing your loan agreement and choose a strategy that aligns with your financial goals.

Adhil Shetty, CEO, BankBazaar.com