Loan Prepayment Calculator
Whether it is a housing loan, personal loan, or any other loan, it is a liability for the borrower. The borrower has to repay the loan amount with interest over specific repayment tenure, decided in advance. The amount that the borrower repays every month is also known as the EMI or Equated Monthly Instalment. Repaying the EMI regularly on time will result in the liquidation of the loan amount at the end of the tenure. However, borrowers have the option of making prepayments or advance payments. The primary objective behind these prepayments is to save on the interest component. Let us examine the concept of prepayment in detail and understand the amount of interest you save by using the Prepayment Calculator.
The Concept of EMI
Before we go into the aspects of the Prepayment Calculator and learn how to use it, it is essential to comprehend the concept of the EMI.
EMI stands for Equated Monthly Instalment. It constitutes the amount that a borrower has to repay every month for specific loan tenure. EMI depends on the following three factors:
- The principal amount of the loan
- The applicable rate of interest on the loan
- The repayment tenure of the loan
The calculation of the EMI is a complex process. However, EMI Calculator is available on the internet. These calculators are also available on the official websites of the individual banks and financial institutions. One such calculator is also available on our site.
Using the EMI Calculator is easy. The user has to enter the following three pieces of information:
- The loan amount
- The rate of interest
- The loan tenure
On entering this data, you get your EMI in an instant.
This EMI comprises of two constituents, the principal repayment component, and the interest repayment portion. Both of these amounts are variable. Usually, the interest portion is higher in the initial stages. It reduces gradually, as the loan gets repaid. Over the entire tenure, the principal amount gets nullified.
The Concept of Prepayment
The borrower has a fixed liability of repaying the EMI every month for the entire tenure. At times, the borrower could receive a lump sum amount that they can use for making a prepayment to the loan account. This prepayment is nothing but an advance payment of the loan. The objective behind the prepayment is to reduce the interest burden on the loan. Banks usually allow such prepayments by the borrower. As this amount goes towards liquidating the principal component of the loan, the borrower benefits by a substantial reduction in the interest portion of the loan.
Different Types of Prepayment
From the concept explained above, you can gather that any amount paid by the borrower over and above the regular EMI is a prepayment. This prepayment can be either a partial prepayment or a complete prepayment. In the case of the latter option, it is also known as the foreclosure of the loan.
Partial prepayments can be of different types, regular prepayment or lump sum prepayment. Regular or periodic prepayment is when the borrower keeps paying excess amounts over the stipulated EMI at regular intervals. This interval can be monthly, quarterly, half-yearly, or annual. Any other type of prepayment is a lump sum prepayment.
The Benefits of Prepayment of the Loan
Prepaying any loan has its merits. The following benefits accrue to the borrower when they make prepayments:
- Any prepayment goes towards reducing the principal component of the loan. It is because the regular EMI takes care of the interest portion every month. Thus, the prepayment reduces the principal liability of the borrower.
- As the principal outstanding amount reduces, the interest component for the future reduces, as well. Therefore, the borrower ends up repaying the entire loan earlier than the scheduled tenure. The loan Prepayment Calculator can help you determine the extent of the benefit.
- The prepayment of a loan reflects your financial stability. That is because you prepay because you have the liquidity.
- Prepaying a home loan can help in saving taxes. The Government of India offers income tax concessions on the repayment of the home loan interest and repayment up to a specific ceiling. Making prepayments can help the borrower take full advantage of these limits and thereby, save tax.
- Your overall liability decreases as you prepay your loan. It has a positive effect on your credit rating. The borrower ends up improving their credit score by making regular prepayments.
The Role of the Loan Prepayment Calculator
We have seen that the manual calculation of the regular EMI itself is a complicated task. Hence, we use the EMI Calculator to do so. Similarly, calculating the effect of a periodic prepayment in a loan account is also a complicated calculating procedure. However, loan Prepayment Calculators make this task easy for us.
The loan Prepayment Calculator helps borrowers in many ways:
- Calculate the total amount of payment to be made to foreclose a loan (full prepayment)
- Calculate the amount of interest you save by reducing the tenure because of regular prepayment (partial prepayment).
- Calculate the amount of interest saved because of making a lump sum payment
How Does the Loan Prepayment Calculator Work?
Similar to the EMI Calculator, the loan Prepayment Calculator requires specific data. We shall compute the working of a loan Prepayment Calculator using a few concrete examples.
- Complete prepayment or foreclosure of a home loan
- Partial prepayment in a lump sum and monthly instalments
We shall choose the home loan for our example because of the following reasons:
- The repayment tenure of a home loan is an extended one. It will be easy to understand the benefits of loan prepayment.
- Usually, people prefer to prepay home loans as compared to other loans. However, the principle and the mode of calculation is the same for all loans.
Scenario 1 - Full prepayment (Foreclosure)
- Home Loan amount - 20 Lakhs
- Repayment tenure - 180 months or 15 years
- The rate of interest - 8.30%
- Number of instalments already paid until date - 36
Enter the above data on the loan Prepayment Calculator to calculate the foreclosure amount.
- The amount necessary to prepay the entire loan - 17,70,843
This amount is also known as the foreclosure amount. It is also equal to the balance outstanding in the loan account at the end of three years. As you repay the entire amount, you save on the whole of future interest payable on the home loan.
Scenario 2 - Partial prepayment in a lump sum (one-time)
- Home Loan amount - 20 Lakhs
- Repayment tenure - 15 years
- Rate of interest - 8.30%
- Number of instalments serviced until date - 36
- Lumpsum amount paid at the end of three years - 5 Lakhs
Using the loan Prepayment Calculator, you can find out the amount of interest saved by the borrower. The loan tenure gets reduced substantially.
Under these circumstances, the borrower ends up saving an overall sum of 6,05,872. The loan tenure reduces by 56 months.
Scenario 3 - Partial prepayment every month (fixed amount)
- Home Loan amount - 20 Lakhs
- Repayment tenure - 15 years
- Rate of interest - 8.30%
- Number of instalments paid till date - 36
- Regular prepayment of 5,000 per month for the remainder of the term
The loan Prepayment Calculator helps in calculating the benefit under such a scenario as well. On submitting this elementary information, the customer can derive the overall benefit. The loan Prepayment Calculator provides a detailed amortisation chart to make it easy for the customer to understand.
The benefit to the borrower is 3,37,392 with the overall repayment tenure getting reduced by 43 months.
We have seen three different scenarios where the loan Prepayment Calculator helps us to determine the benefits that accrue to the borrower.
Benefits of Using the Loan Prepayment Calculator
The loan Prepayment Calculator is available on the official websites of many banks and financing companies. MyMoneyMantra.com has one such calculator that can help customers to determine their prepayment amount at a glance.
- Enter the minimum data for determining the prepayment amount
- The borrower can calculate the home loan foreclosure amount using this calculator
- The loan Prepayment Calculator also helps the customer to determine the interest benefits as well as understand the revised repayment tenure.
The loan amortisation chart provides detailed information about the benefits available to the customer.
Loan Prepayment Calculator - Frequently Asked Questions
Is it advisable to prepay any loan when I have surplus funds?
It depends on the types of loans you have in your portfolio. Prepaying a home loan is beneficial because you end up saving considerable interest over the entire tenure of the home loan. It is also advisable to prepay personal loans because these loans come at a high cost. With investments in the market not fetching attractive returns today, it makes sense to prepay loans and get rid of the liabilities.
What is the difference between a part prepayment and a full prepayment?
As the name suggests, the full prepayment results in the foreclosure of the loan. You get rid of the entire liability. In the case of a part prepayment, you reduce your existing commitment to the extent of the prepayment amount. The interest saving is an additional benefit.
Is it possible to use the loan Prepayment Calculator if there is a prepayment penalty factor?
Yes, the loan Prepayment Calculator comes with an option where you can enter information concerning the penal rate of interest. If there is no penalty stipulation, the system allows you to leave the column blank. It is the most accurate tool to calculate the loan prepayment amount and benefits that accrue because of the prepayment.
Are there any restrictions from the bank side for the prepayment of loans?
Usually, the nationalised banks do not place any restrictions on the prepayment of home loans. Private banks and housing finance companies have their internal policies. There could be restrictions on the amount of prepayment, the frequency of prepayment, and so on. As far as personal loans and other loans are concerned, there could be lock-in periods where the borrower cannot make any prepayment.
What is the right time for making a prepayment of loans?
The ideal timing for prepayment of any loan is in the initial stages of the loan. The home loan has an extended tenure. Hence, it is one of the best loans to make a prepayment. In the case of other loans, you should calculate the benefits that accrue from prepaying the loan amount using the loan Prepayment Calculator. If it is beneficial, you can proceed with the prepayment.
Why does the home loan repayment tenure reduce when you prepay a part of your home loan?
As explained before, the EMI comprises of the interest repayment and principal repayment portions. Hence, any payment above the regular EMI will go on to reduce the principal amount. The EMI is directly proportional to the principal outstanding amount and the rate of interest. It is also inversely proportional to the tenure. Thus, if you do not reduce the EMI, the mandate will automatically reduce.
Is it advisable to reduce the EMI and maintain the tenure constant after a prepayment?
It depends on the situation. If you have a high degree of financial stability, you can maintain the EMI as constant and reduce the tenure. You could end up closing the loan quicker. However, under specific circumstances, you might have to reduce the EMI.
What circumstances could force you to reduce the EMI?
Circumstances can arise when you might have a reduced income after an event such as retirement. Under such circumstances, it is a better idea to use a portion of the retirement benefits and make a substantial prepayment. You can then request the bank to reduce your EMI and maintain the residual tenure as constant. It will help you cope with the EMI burden better.
Which is the better option, to pay a lump sum or make regular monthly prepayments?
Making a lumpsum prepayment is always beneficial because you tend to save a significant portion of interest. However, if you have the required income to make regular monthly prepayments, it is an excellent habit. You could end up saving a useful amount by reducing the residual tenure considerably.
Is there any standard formula for calculating the prepayment amount and the benefits that accrue because of it?
The manual calculation could be a tedious one. Customers can use MS Excel tables to arrive at the amounts. However, the best option is to use the readymade loan Prepayment Calculator. With the minimum of effort, you get the best and most accurate results.