How prepayment of loan is calculated?

Loan prepayment calculation involves determining the exact amount required to settle the outstanding loan balance before maturity. This calculation includes principal outstanding, accrued interest up to prepayment date, and any applicable prepayment charges or fees.

The prepayment amount comprises several components. Principal outstanding represents the remaining loan balance excluding future interest obligations. Accrued interest covers interest accumulated from the last EMI payment date to the prepayment date, calculated on a daily basis.

Calculation components:

• Outstanding principal balance
• Accrued interest from last payment date
• Prepayment penalty charges (if applicable)
• Processing fees for prepayment (if any)

Most lenders provide online calculators or detailed statements showing exact prepayment amounts. Interest calculation follows the reducing balance method, where daily interest is computed on the outstanding principal amount.

For EMI-based loans, calculate the principal component paid and subtract from the original loan amount. Add accrued interest for the current month and any applicable charges. Some lenders charge prepayment penalties ranging from 2-4% of the outstanding amount, particularly for fixed-rate loans.

Timing impacts prepayment amounts significantly. Prepaying immediately after an EMI payment minimises accrued interest, whilst prepaying just before the next EMI due date maximises accrued interest charges.

Request official prepayment quotations from lenders specifying the exact amount required and validity period. These quotations typically remain valid for 7-15 days. Ensure calculations include all charges and fees to avoid surprises during the prepayment process.

Document all prepayment transactions and obtain proper closure certificates from lenders confirming complete loan settlement.