Loan Prepayment Calculator
What a lump-sum prepayment actually buys you, and which of the two options (keep the EMI and shorten the tenure, or keep the tenure and cut the EMI) saves more.
Also called: part payment calculator, lump sum prepayment, foreclosure calculator.
Keeping the EMI and shortening the tenure saves $142,483 and clears the loan 5 years 9 months earlier. Reducing the EMI instead saves only $44,050.00. Interest is a function of balance and time, and shortening the tenure attacks both.
An estimate, not an offer or a guarantee. Projected returns assume the rate you entered holds for the whole term, which no market does.
This is what the calculation gives for the numbers you entered. It is an estimate, not advice, and it knows nothing about your situation beyond those numbers. Rules for United States change on a published schedule; the effective date is shown on every rule-based tool.
How this is calculated
A lump sum X paid after k instalments reduces the balance to B_k − X. From there two things can happen. Keep the EMI and the remaining term shortens; keep the term and the EMI falls. Shortening the tenure always saves more, often by three or four times, because interest is a function of balance multiplied by time and only that option attacks both.
m = -ln(1 - i*(B_k - X)/E) / ln(1+i)- E
- The equal periodic instalment (currency)
- P
- Principal: the amount borrowed (currency)
- i
- Monthly interest rate = annual rate ÷ 12 ÷ 100 (decimal)
- n
- Total number of monthly instalments (months)
- X
- The lump sum prepaid (currency)
- m
- Remaining instalments after prepayment (months)
Method and limits
What it assumes
- Interest compounds monthly on the reducing balance.
- The rate stays fixed for the whole term. Floating-rate loans reset periodically.
- Processing fees, insurance and statutory charges are excluded.
- The prepayment is applied in full to principal with no charge. Check your own agreement. Foreclosure charges on fixed-rate loans are common.
What it deliberately does not model
- Ignores prepayment penalties and foreclosure charges, which vary by lender and by whether the rate is fixed or floating.
- Does not weigh prepaying against investing the same money. Prepaying earns a risk-free return equal to the loan rate; it beats investing whenever the loan rate exceeds your after-tax expected return.
Formula version 1.0.0 · definition 1.0.0 · United States · Report a problem with this calculator
Frequently asked questions
- Is it better to reduce the EMI or the tenure?
- The tenure, substantially, usually by a factor of three or four. Interest depends on how much you owe and for how long, and reducing the tenure is the only option that shortens both.