Should I prepay my personal loan or invest the money?

Compare the loan rate against your realistic post-tax investment return; above a 12% loan rate, the guaranteed saving from prepayment beats most market expectations.

Are there charges for prepaying a personal loan?

Floating rate personal loans have no prepayment charge under RBI rules; fixed rate loans may charge 2 to 5% plus GST, which this comparison should account for.

Is it better to reduce EMI or tenure when prepaying?

Reducing tenure while keeping the same EMI saves the most interest; reducing EMI eases monthly cash flow but saves less overall.

Should I keep an emergency fund before prepaying?

Yes, hold 3 to 6 months of expenses and EMIs first; a prepaid loan cannot be withdrawn back when you need cash suddenly.

Does prepaying a loan improve my credit score?

A lower outstanding and eventual closure help modestly; the bigger benefit is freed EMI capacity for future borrowing at better terms.

Prepay vs Invest Calculator

Compare a guaranteed, tax-free return from prepaying your loan against the expected post-tax gains of investing that lump sum.

Post-tax comparison Tenure reduction shown Guaranteed vs expected

Lump sum in handRs. 2,00,000

Loan outstandingRs. 8,00,000

Loan interest rate14% p.a.

Remaining tenure48 months

Expected investment return12% p.a.

Tax on investment gains12.5%

Option A: Prepay the loan

Rs. 1,06,057

guaranteed interest saved; tenure drops from 48 to 34 months

Option B: Invest the money

Rs. 1,00,366

expected post-tax gain over the same 48 months, not guaranteed

Prepaying wins by Rs. 5,691. Saving 14% interest is a guaranteed, tax-free return no market investment at 12% expected can reliably beat. Prepay, then redirect the freed-up EMI months into investing.

KharchaUdhar Insider Tip Prepayment interest saved is effectively a tax-free return, while investment gains are taxed. To beat a 14% loan, an equity fund taxed at 12.5% LTCG must return over 16% every single year. Keep 3 to 6 months of EMIs as emergency buffer before prepaying anything; a prepaid loan cannot be un-prepaid when you need cash.

Prepayment modelled as reduce-tenure with unchanged EMI, the option that saves the most interest. Floating rate personal loan prepayment carries no charge under RBI rules. Indicative only.

KharchaUdhar Insider Tip Prepayment savings are tax-free; investment returns are not. To beat a 14% personal loan, an equity fund taxed at 12.5% LTCG must deliver over 16% every year without fail. Above a 12% loan rate, prepaying wins for almost everyone; below 9%, investing usually does. The 9 to 12% band is where this calculator earns its keep.

Prepay vs Invest Calculator

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