Prepayment calculator
Free, no sign-up, runs in your browser.
Paying extra against the principal does one of two things, and which one you get is usually a box you tick at the branch: the loan ends sooner, or the instalment falls. The difference between them is far larger than most borrowers expect, and it runs in the opposite direction to what feels better month to month.
The formula
A prepayment reduces the balance directly, so every month after it accrues interest on a smaller number. Keeping the instalment applies the whole saving to the term; keeping the term applies it to the payment, which is re-solved over the months that remain.
A worked example
A $250,000 loan at 8.75% over 20 years:
| Monthly instalment | $2,209 |
|---|---|
| Total interest | $280,225 |
| Total repaid | $530,225 |
| Interest vs loan | 112% |
| Interest in month 1 | $1,823 |
| Interest in the final month | $16 |
What to watch
- Early prepayments are worth several times late ones. In the first years almost all of the instalment is interest, so cutting the balance then removes interest you would have paid for the entire remaining term.
- Keeping the instalment and shortening the term saves far more than lowering the instalment, because interest accrues on time as much as on money.
- Whether you are charged depends on whether your rate is floating or fixed — a distinction many borrowers have never checked and which makes prepayment free or costly.
- A small monthly top-up often beats a rare lump sum of the same annual value, because it starts cutting the balance twelve months earlier.
The trap
Taking the lower instalment because it feels like relief. It is the option that costs more, often by multiples, and it is frequently the one offered by default.
Questions
Does prepaying a loan save money?
Almost always, and more than people expect. On our $250,000 example at 8.75%, a single prepayment in the second year saves $83,614 in interest when the term is shortened. The exception is a loan with a prepayment charge large enough to outweigh it, which you should subtract before deciding.
Is it better to reduce the EMI or the tenure?
Reducing the tenure, by a wide margin, if your budget can take the unchanged payment. Reducing the instalment helps monthly cash flow but leaves the loan running the same length, so most of the interest you were trying to avoid is still charged.
When is the best time to prepay?
As early as you can. The same amount paid in year two of a twenty-year loan removes far more interest than it does in year twelve, because in the early years the balance — and so the interest accruing on it — is at its largest.
Rate bands and lending rules on this page were last reviewed on 2026-10-23 and are indicative, not offers. The arithmetic is produced by the same code the calculator runs. Confirm the terms with your own lender before committing; nothing here is financial advice.