How the EMI is worked out
EMI = P × i × (1 + i)n ÷ ((1 + i)n − 1), where P is the loan, i the monthly rate (annual rate ÷ 12) and n the number of months. Each EMI first pays the month's interest on the outstanding balance; the rest reduces principal, which is why early EMIs are mostly interest.
Reduce tenure or reduce EMI?
Keeping the EMI and cutting the tenure saves more interest, because the higher EMI keeps retiring principal faster. Reducing the EMI helps cash flow. For a business loan, compare the interest saved with what the same cash earns in the business before you prepay.
Common questions
Is there a charge for prepaying a home loan?
For floating-rate loans taken by individuals for non-business purposes, RBI does not allow banks and NBFCs to levy foreclosure or prepayment charges. Fixed-rate and business loans can carry a charge; check the sanction letter.
Does prepayment reduce EMI or tenure automatically?
Most lenders reduce tenure by default and reset the EMI only on request. Ask for the revised repayment schedule after every part-payment.