What the instalment is made of
Interest is charged on the balance still outstanding. Early in the loan that balance is large, so most of the instalment is interest and only a little goes to principal. As the balance falls, the interest share falls with it and the principal share grows. The instalment stays the same; the split inside it does not. That schedule is called amortisation.
The three levers
- Amount: the EMI moves in direct proportion; borrow half, pay roughly half
- Rate: a higher rate raises both the EMI and the total interest paid
- Tenure: a longer tenure lowers the EMI but raises the total interest, because the balance stays outstanding longer
Why prepayment early is worth more
A prepayment reduces the outstanding balance, and every future month’s interest is computed on that smaller balance. The earlier it lands, the more months it saves interest on. Check your lender’s part-prepayment and foreclosure terms first, because charges and lock-ins differ, particularly on fixed-rate loans.
Reading an offer properly
- Compare the total of all payments, not just the monthly figure
- Check whether the rate is fixed or floating, and what it is benchmarked to
- Add processing fees and insurance loaded into the loan when comparing offers
- Confirm whether the quoted rate is on a reducing balance or a flat basis, because the two are not comparable
Frequently asked questions
Why is my loan balance barely moving in the first year?
Because early instalments are mostly interest on a large outstanding balance. The principal share rises steadily as the balance comes down.
Does a longer tenure make a loan cheaper?
It makes the monthly instalment smaller but the loan more expensive overall, since interest accrues on the outstanding balance for longer.
Will prepaying reduce my EMI or my tenure?
Most lenders let you choose. Reducing the tenure saves more interest; reducing the EMI eases monthly cash flow.
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