For floating-rate loans, RBI has mandated that banks cannot charge prepayment or foreclosure penalties. However, for fixed-rate loans, lenders may charge a prepayment penalty typically ranging from 1% to 5% of the prepaid amount. Always check your loan agreement for specific terms before making a prepayment.
Partial prepayment means paying an extra lump sum towards your loan principal while continuing regular EMIs. This reduces either your EMI amount or loan tenure. Full prepayment (foreclosure) means paying off the entire remaining loan balance at once, completely closing the loan account.
Prepaying early in the loan tenure yields maximum savings because the interest component in your EMI is highest during the initial years. As a rule of thumb, prepayment is most beneficial in the first half of your loan tenure. In the later years, most of your EMI goes towards principal, so the interest savings from prepayment are relatively smaller.
When you make a partial prepayment, most lenders give you the option to either reduce your monthly EMI (keeping the same tenure) or reduce the loan tenure (keeping the same EMI). Reducing the tenure generally saves more on total interest, while reducing the EMI provides immediate monthly cash flow relief.