Prepay your loan, or invest instead?

You have some spare cash. Should you throw it at your loan, or put it to work in an investment? There is no single right answer, but there is a simple way to think about it, and the timing matters more than most people realise.

The core rule

Compare two numbers: the interest rate on your loan and the return you could reliably earn after tax. If your loan costs more than you can safely earn, prepaying is the better guaranteed return. Clearing a 14% loan is a certain 14% saved; few investments beat that without risk.

Why early prepayment saves the most

On a reducing balance loan, the early EMIs are mostly interest. So a prepayment in the first months kills far more future interest than the same amount paid near the end.

Take our representative personal loan: ₹1,00,000 over 12 months at 14% p.a., EMI ₹8,979, with about ₹7,748 of total interest. Now prepay an extra ₹20,000 in month 6 and keep the EMI the same. You save roughly ₹1,260 in interest and close the loan about two months early. The same ₹20,000 paid in the final month would save almost nothing. Early beats late.

When not to prepay

• You have no emergency fund. Keep three to six months of expenses in cash first. A loan you can service beats being cash-poor.
• The loan is cheap and your investment is reliably higher. If a subsidised loan costs less than a safe return, let it run.
• Prepaying would leave you exposed. Liquidity has value; do not drain it to save a little interest.

How prepayment works at Bindaas

It is free. Any part-payment or full foreclosure after your first EMI costs ₹0, with no penalty, done from the app. A part-payment cuts your principal, and you choose whether that lowers your EMI or shortens your tenure. Run the numbers on our EMI calculator before you decide.