Loan Prepayment Calculator: Reduce Tenure

How the sum works

On a reducing-balance loan, each month’s interest is charged on what you still owe. Money you pay early comes off what you owe, so it stops collecting interest for every month that is left. Your EMI (equated monthly instalment, the same payment every month) does not change, so the loan simply ends sooner.

On a flat-rate loan, the interest is worked out once, on the amount you first borrowed, for the whole term, and added to the debt when you sign. Paying early gets you to the end sooner, but the total interest stays the same, so the saving is 0.00.

Extra payments here land after each month’s interest has been charged, which is how a real extra payment works.

An example

Take 500,000 borrowed at 10% a year for 120 months (10 years), on a reducing balance. The instalment is 6,607.54 and the total interest is 292,904.20. Paying 2,000 extra every month from the first payment clears it in 80 months instead of 120, which is 40 months sooner, and saves 106,489.63 in interest.

The same numbers on a flat-rate loan: the interest is fixed at signing, at 500,000 over the term, so the same extra payments save 0.00 in interest, though the loan ends 38 months sooner.

Reduce tenure or reduce EMI

When you prepay, lenders often let you choose. You can keep the same instalment and finish sooner (reduce tenure), or keep the same end date and pay a smaller instalment (reduce EMI).

This calculator shows the first, which is also what Wealth Mutant’s own simulator does. Keeping the instalment clears the balance faster, so it usually saves more interest than lowering the instalment.

Check your agreement

Early-settlement charges, and limits on how much you can overpay, are set in your loan agreement and appear in no figure here. On a flat-rate loan, ask your lender for a settlement quote: that number is the real answer.

How Loan Accounts Work explains how Wealth Mutant handles a loan, including its prepayment simulator.