When planning to close a loan early, most borrowers struggle with one common question:
Is it better to increase the EMI or shorten the loan tenure?
Both options can reduce the overall interest burden, but their impact, benefits, and suitability differ based on income stability, financial goals, and risk appetite. Understanding how each option works can help you become debt-free faster and smarter.
How Increasing Your EMI Works
When you increase your EMI, you pay a higher monthly amount, which leads to faster principal reduction. As a result, interest charged on the outstanding balance reduces, and your loan finishes earlier even without officially reducing the tenure.
Pros
Faster principal repayment
Lower overall interest cost
Tenure reduces automatically
Good for people with stable rising income (salary hike, business growth)
Cons
Increases monthly financial pressure
Risky if income is unstable or uncertain
Can affect savings and emergency funds if not planned
How Reducing the Tenure Works
When you formally reduce your loan tenure, the EMI naturally increases because the same loan must now be paid back in fewer months.
Pros
Maximum interest savings possible
Clear, structured repayment timeline
Best option for disciplined borrowers
Cons
EMI may rise sharply
Not suitable if monthly cash flow is tight
Bank approval may be needed, depending on loan type
Which Option Saves More Money?
From a pure financial perspective, shortening the tenure usually saves more interest than simply increasing EMI, because:
Interest is calculated for fewer months
Loan amortization accelerates significantly
However, if you prefer flexibility, increasing EMI (voluntarily or through part-payments) may be better because it allows adjustment based on income flow.
Decision Framework (Quick Guide)
| Situation | Better Option | Reason |
|---|---|---|
| Salary or business income increasing steadily | Increase EMI | Gradual repayment pressure |
| Want maximum interest savings | Reduce Tenure | Highest financial benefit |
| Income irregular or seasonal | Voluntary EMI increase or prepayment | Flexible & safer |
| Close loan with bonuses or lump-sums | Part-payment + shorten tenure | Smart hybrid approach |
| Need mental peace with fixed closing date | Reduce Tenure | Clear finish line |
Smart Hybrid Strategy (Recommended)
The best approach for many borrowers is:
1️⃣ Make lump-sum prepayments whenever possible
2️⃣ After each prepayment, apply it to reduce the tenure
3️⃣ If income rises, increase EMI gradually
This combines flexibility + maximum interest savings.
❓ FAQs
Q1: Does prepayment or tenure reduction hurt credit score?
No, early repayment does not harm credit score; it may improve it over time.
Q2: Should I close high-interest loans first?
Yes. Prioritize credit cards, personal loans, and business loans before home loans.
Q3: Is part-payment better than increasing EMI?
If you receive bonus or lump-sum income, part-payment helps significantly. For stable monthly cash flow, EMI increase works.
Q4: Will banks charge penalty for prepayment?
This depends on loan type (usually no penalty for floating-rate home loans; check terms for others).
Published on : 17th November
Published by : SMITA
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