No, it actually does not.
Many borrowers misunderstand that part-prepayments will reduce your EMI. It does not.
Your EMI is composed of the principal component and the interest component.
- Now, the interest is calculated at the end of every month based on the total outstanding principal on the loan account.
- When you pay your EMI, the interest amount is deducted and the rest is paid towards the principal.
- Now, when you make a prepayment, the total principal outstanding is reduced.
- This, in turn, will reduce the interest calculated at the end of the month.
- So, when the EMI is paid the next month, the interest component in it is less and so, more amount goes towards the principal.
- This way, whenever you make a prepayment, the interest component in your EMI amount will decrease, the principle component will increase.
Though prepayment doesn’t reduce the EMI, it will effectively reduce the total tenure of your loan.
If you would like to reduce your monthly EMI, you have to talk to your bank and restructure your debt.
Another option is to opt for a loan transfer to another loan and negotiate for a better interest rate and other terms on your loan.