Calculate the money and time saved by additional, unplanned loan prepayments

What are the basic loan related terms I need to know?

Duration: The duration of a loan is the length of time for which a loan is held. The duration can be calculated mathematically for a given interest rate, amount and EMI.

EMI: An EMI, or equated monthly instalment, refers to a constant monthly payment made to a lender. This term is used when a loan is paid back in instalments over a period of time.

Principal amount: The EMI consists of two parts - the interest and principal amount. The principal amount is the amount of an EMI in a given period that goes towards repaying the principal of a loan in the period. Over time, the principal amount of the EMI increases, while the principal amount decreases.

Interest amount: The interest amount is the amount of an EMI in a given period that goes towards repaying the interest due on a loan in the period. Over time, the interest amount of the EMI decreases, while the principal amount increases.

Interest rate: Interest is the amount of extra money you have to pay back on top of the amount you borrowed. It's like a fee for borrowing money. The interest rate is usually expressed as a percentage of the original amount borrowed, and it determines how much you'll have to repay over time.

Prepayment: On this website, if an amount larger than the determined EMI is paid back in a certain period, it is viewed as a prepayment. Note: Not all loans allow paying an amount larger than the EMI and some may even restrict when this can be done, how much can be paid in addition to the EMI etc.

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How much time and money can I save by making additional payments on a loan?

Each loan has a different principal, annual interest rate, and duration. Let us look at an example where ₹30,00,000 is borrowed for a period of 30 years at a rate of 8%. The EMI would be ₹22,012.94 for 360 months. The total principal amount to be repaid would be ₹30,00,000 and the total interest amount due on this loan would be ₹49,24,657.39.

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There are many different combinations that could exist to repay a loan faster. Let us look at 4 cases below.

In cases 1 and 2, the difference between paying a sum of money (₹2,00,000) in the first and 12th period is shown. We see that the sooner a pre-payment is made, the larger the time and money savings. This is shown in cases 3 and 4 as well, however, these cases consider 4 pre-payments at different points of time.

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Case 1: In period 1, an additional amount of ₹2,00,000 is paid

Time saved: 6.33 years

Money saved: ₹14,75,176.42

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Case 2: In period 12, an additional amount of ₹2,00,000 is paid

Time saved: 5.92 years

Money saved: ₹13,81,075.61

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Case 3: In periods 12, 24, 36, and 48 an additional amount of ₹2,00,000 is paid (this could be possible if money from a yearly bonus, stock dividends, returns from other investments etc is used to repay the loan)

Time saved: 14.5 years

Money saved: ₹30,32,097.76

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Case 4: In periods 120, 200, and 240  an additional amount of ₹2,00,000 is paid (this could be possible if money from a yearly bonus, stock dividends, returns from other investments etc is used to repay the loan)

Time saved: 5.92

Money saved: ₹9,74,161.71

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What should I understand from the examples in the four situations described above?

Some of the main take-aways are:

1. The sooner one or more pre-payment are made, the larger the amount of time and money saved

2. The money used to make one or more additional pre-payments could be viewed as an "investment", but rather than making money, this investment reduces interest costs of the loan

3. By paying off the loan faster, the money that would have otherwise been used to repay the loan (and interest accumulated) can be used for any other purpose, e.g. an investment, other spending etc

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How can I generate funds to pre-pay the loan faster if I am already on a tight budget?

Understandably, pre-paying a loan may not be possible for everyone, especially if one assumes that the borrower opts for the largest possible EMI. However, they may be other ways to slowly collect money with the purpose to use it to repay the loan faster over time:

1. Use a part of a received yearly bonus, dividend from stocks, returns from sale of stock etc

2. Cut down on expenses such as a coffee-to-go, snack outside, ordering drinks at a restaurant etc

3. Discontinue unnecessary or rarely used subscriptions

4. Limit impulsive purchases

5. Use public transport

6. Optimise expenses by choosing more economical mobile plans, using sales in groceries/online, reduce visits to restaurants, electricity consumed at home etc

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What does this loan pre-payment calculator do?

This calculator estimates the loan repayment schedule using three compulsory inputs: loan amount, annual interest rate, and the loan duration as well as the optional inputs of additional, extra payments. In this calculator, the option to make additional payments is enabled which allows an estimation of the time and money savings by making one or more additional payments at any specified point of time. 

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How can I save money on a loan?

There are many ways to save money on a loan. One of them is to increase the EMI or pay lumpsums whenever possible (if the loan contract allows it) especially at the beginning of a loan. You can also save money on a loan by refinancing etc. These methods are currently not supported or described in further detail on this page.

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Why is this calculator useful?

This required investment calculator is useful as it can help a person understand how a loan repayment schedule is structured and the impact of additional payments on the loan repayment schedule. This understanding can help in understanding the impact of different available loans and extra pre-payments leading to an optimisation of future costs by reducing the final cost of the loan.   

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How do I use this calculator to estimate the impact of additional payments on my loan?

Instructions to use this loan pre-payment calculator are provided above.