Reduce EMI or Reduce Tenure After Part Payment — The Verdict With Real Numbers

You've just made a part payment on your home loan, and your bank is asking whether you want to reduce your EMI or reduce the tenure of your loan. You have to make a decision on the spot, but you're not sure which option is better. You're worried that you might make the wrong choice and end up paying more interest than you need to. This is a critical moment, as the decision you make will affect your finances for years to come.

The short answer is that for 90% of Indian home loan borrowers in the first 10 years, reducing tenure saves significantly more money. Here is the exact calculation: on a ₹50,00,000 loan at 8.5% interest for 20 years, reducing tenure after a ₹10,00,000 part payment saves ₹4,11,119 in interest, while reducing EMI saves only ₹2,49,911. Here is exactly why, and when the rule changes. The key insight is that when you reduce tenure, you're essentially prepaying a portion of your loan, which reduces the principal amount that's subject to interest. This, in turn, reduces the total interest you pay over the life of the loan.

The Numbers

Let's take a closer look at the numbers. On a ₹50,00,000 loan at 8.5% interest for 20 years, the original EMI is ₹43,391. If you make a part payment of ₹10,00,000, you have two options: reduce EMI or reduce tenure. If you reduce EMI, your new EMI will be ₹34,611, and you'll save ₹8,780 per month. However, if you reduce tenure, your new EMI will still be ₹43,391, but you'll save 4 years and 3 months on your loan tenure. To calculate the interest saved, we need to calculate the total interest paid in both scenarios:

As you can see, reducing tenure saves ₹1,61,208 more in interest than reducing EMI. This is because when you reduce tenure, you're essentially prepaying a portion of your loan, which reduces the principal amount that's subject to interest.

Calculator

Run your own numbers below to see exactly how this works for your loan:

If your interest saved is above ₹25,000, reducing tenure is clearly the better option. However, if your interest saved is below ₹25,000, reducing EMI might be a better option, especially if you're struggling to make your monthly payments. It's also important to note that banks and NBFCs often charge a prepayment penalty for part payments, which can range from 2-5% of the part payment amount. However, the RBI has mandated that there should be no prepayment penalty on floating rate home loans, so you won't have to worry about this if you have a floating rate loan.

When the Rule Changes

The rule changes when you're in the last 5 years of your loan tenure. In this scenario, reducing EMI might be a better option, as you'll save more on your monthly payments. Additionally, if you're self-employed or have irregular income, reducing EMI might be a better option, as it will give you more flexibility in your monthly cash flow. It's also important to note that if you have a high-interest loan, such as a personal loan or credit card debt, you should prioritize paying off those loans first, as they will save you more money in interest in the long run.

The RBI / Tax Rule

It's also important to note that the RBI has mandated that there should be no prepayment penalty on all floating rate home loans. This means that you can make part payments on your home loan without worrying about paying a penalty. Additionally, the tax benefits on home loans can be significant, with the old tax regime allowing for a deduction of up to ₹2,00,000 on interest paid. However, the new tax regime has removed this deduction, so it's essential to consider your tax implications before making a decision.

What To Do Right Now

Here are the exact steps you can take today to make the most of your part payment:

1. Call your bank and ask for your outstanding principal as of today.
2. Use the calculator above with your exact numbers to see which option saves you more money.
3. If reducing tenure saves you more than ₹25,000, call back and confirm tenure reduction.
4. Log the result in your free LastEMI dashboard to track your progress and see your debt-free date update in real time.

Track every part payment and see your debt-free date update in real time — free at lastemi.com, no credit card, no spam calls.