Personal Loan EMI: While obtaining a personal loan is quite easy, the interest cost can be a heavy burden on your finances—especially when the loan tenure is long. This raises the question: if you come into some extra funds, how beneficial is it to pay off the loan early?

Let’s understand this with a simple example. Suppose you take a personal loan of ₹5 lakh at an annual interest rate of 12% for a tenure of 5 years (60 months).

How much interest would you pay over 5 years?

For this ₹5 lakh loan at 12% interest, your EMI would be approximately ₹11,122. If you pay this EMI for 60 months, you will end up paying a total of about ₹6.67 lakh to the bank.

This means that, in addition to the principal amount of ₹5 lakh, you would pay around ₹1.67 lakh solely in interest.

What happens if you pay off the loan in 3 years?

Now, suppose you decide to pay off this same ₹5 lakh loan in 3 years instead of 5. In this scenario, your EMI would increase to approximately ₹16,607.

However, the total interest payable would drop significantly due to the shorter tenure. Over 36 months, you would pay the bank a total of about ₹5.98 lakh, with the interest component amounting to approximately ₹97,858. This means that paying off the loan in 3 years instead of 5 could save you around ₹69,476 in interest.

Loan Tenure    EMI    Total Interest
5 Years    Approx. ₹11,122    Approx. ₹1.67 lakh
3 Years    Approx. ₹16,607    Approx. ₹97,858
Interest Savings    —    Approx. ₹69,476

But increasing the EMI isn't right for everyone.

It is important to understand one thing here: paying off a loan early means you have to allocate a larger amount towards the EMI each month. Therefore, the decision should not be based solely on interest savings. If your income is stable and you can comfortably manage an EMI of ₹16,000–₹17,000, a shorter-tenure loan might be more beneficial in terms of interest costs. However, if a higher EMI would impact your other expenses or emergency fund, it is best not to rush into it.

**Consider other charges as well**

If you intend to close the personal loan early, be sure to check the bank or NBFC's prepayment or foreclosure charges. These charges can alter the actual savings.

In this example, assuming a 12% interest rate and no additional charges, paying off a ₹5 lakh loan in 3 years instead of 5 years results in an interest saving of approximately ₹69,000. In other words, simply paying off the loan sooner can lead to significant savings.

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