Educational Purpose Only: This guide demonstrates how to use our calculators to compare financial scenarios. We are not financial advisors. All examples are illustrative. Please consult a certified financial planner before making financial decisions.
🔁 Should You Prepay Loan or Invest?
You have ₹50,000 surplus every month. Should you prepay your home loan or invest in SIP? The answer depends on loan interest rate, investment returns, tax benefits, and your risk appetite. Here's the complete decision framework.
The Core Trade-off
It's a math + psychology decision
- Prepay Loan: Guaranteed "return" = loan interest saved (7-9%)
- Invest in SIP: Potential return = 10-12% (equity), but market-linked
- Difference: 2-5% extra return, but with volatility risk
- Psychology: Being debt-free brings peace of mind (can't quantify)
Quick Decision Framework
| Your Situation | Best Choice | Reasoning |
|---|---|---|
| High loan rate (12%+) | Prepay Loan | Hard to beat 12% guaranteed return |
| Low loan rate (6-7%) | Invest in SIP | Equity can deliver 10-12% long-term |
| Moderate rate (8-9%) | 50:50 Split | Balance guaranteed savings + growth |
| Debt-averse personality | Prepay Loan | Peace of mind > 2-3% extra return |
| Risk-taker, long timeline | Invest in SIP | Equity compounds over 15-20 years |
| No emergency fund | Build Emergency Fund First | Liquidity trumps optimization |
Step 1: Calculate Both Scenarios
Use the Prepay vs Invest Calculator to compare side-by-side:
Scenario A: Prepay Loan
- • Outstanding: ₹40 lakhs | Rate: 8.5% | Tenure: 15 years
- • Extra Payment: ₹10,000/month
- Result: Save ₹12.5 lakhs interest, finish 5 years early
Scenario B: Invest in SIP
- • SIP Amount: ₹10,000/month | Return: 12% | Duration: 15 years
- Result: Build ₹50 lakhs corpus (vs ₹18 lakh invested)
- After loan completion, use corpus to prepay or keep invested
Net Comparison: Investing builds ₹50L vs saving ₹12.5L → ₹37.5L advantage for SIP (in this scenario)
Step 2: Factor in Tax Benefits
🧾 Tax Deductions Change the Math
- Home Loan: ₹2L interest deduction (Sec 24) + ₹1.5L principal (Sec 80C)
- Effective Rate: 8.5% loan → 6% after tax (if in 30% bracket)
- SIP: LTCG tax 12.5% (holding >1 year on equity)
- Takeaway: Lower effective loan rate tips balance toward investing
Pro Tip: If you're maxing out Sec 80C deductions, home loan principal doesn't add extra tax benefit.
Step 3: Consider Your Liquidity Needs
- ✅ Prepay Loan: Money is locked—can't access without taking new loan
- ✅ SIP Investment: Liquid—can redeem anytime (but avoid before 5 years for tax)
- ⚠️ Emergency Fund First: Keep 6-12 months expenses before either strategy
- 💡 Balanced Approach: Prepay 60%, invest 40% to maintain liquidity
Hybrid Strategy (Best for Most People)
- Build Emergency Fund: 6-12 months expenses in savings/liquid fund
- Split Surplus 50:50: ₹5k to loan prepayment, ₹5k to SIP
- Use Windfalls for Loan: Bonuses, gifts → lumpsum prepayment
- Increase SIP Gradually: As loan reduces, shift more to investments
- Reevaluate Annually: Adjust split based on loan balance, goals
This gives you both guaranteed savings (loan interest) + wealth building (SIP) + peace of mind.
When to ALWAYS Prepay First
- ❗ Personal loan at 14-18% interest
- ❗ Credit card debt at 18-36% APR
- ❗ Education loan at 12%+ (no tax benefit after 8 years)
- ❗ Less than 5 years to retirement
- ❗ Variable income (freelance, business)—reduce fixed EMI burden
When to ALWAYS Invest First
- ✅ Loan rate below 7% (subsidized housing, gold loan)
- ✅ 20+ years timeline for investment compounding
- ✅ High risk appetite + strong emergency fund
- ✅ Maxing out tax-saving instruments (80C, NPS)
- ✅ Specific future goal (child education in 15 years)
Real-Life Scenario Breakdown
📊 Case Study: ₹50L Home Loan @ 8.5%, ₹10k/month surplus
Option 1: Prepay ₹10k/month
- • Tenure: 20 years → 13 years (7 years saved)
- • Interest: ₹47L → ₹32L (₹15L saved)
- • Total Paid: ₹82L (loan + prepayment)
Option 2: Invest ₹10k/month @ 12%
- • 20-year SIP corpus: ₹99 lakhs (₹24L invested → ₹75L gains)
- • Loan interest paid: ₹47L
- • Net Wealth: ₹99L - ₹47L (loan cost) = ₹52L net advantage
Option 3: Hybrid (₹5k prepay + ₹5k SIP)
- • Tenure: 20 → 15.5 years (4.5 years saved)
- • Interest saved: ₹8L
- • SIP corpus @ 15.5 years: ₹32L
- Total Benefit: ₹40L (₹8L savings + ₹32L wealth)
- Plus: Liquidity maintained via SIP investments
Winner: Pure SIP wins mathematically (+₹52L), but Hybrid offers balance between wealth, reduced debt, and liquidity.
Key Considerations Beyond Math
- Peace of Mind: Some people sleep better debt-free—worth paying 2-3% return opportunity cost
- Market Volatility: SIP returns aren't guaranteed—could be 8-15% range
- Discipline: Will you actually invest ₹10k/month, or spend it? Prepayment is forced savings.
- Life Stage: Young (25-35)? Invest. Near retirement (50+)? Prepay.
- Family Security: If sole earner, reducing EMI = lower family burden
Use the Calculator to Decide
Final Recommendation
✨ The Optimal Path for Most People:
- Build 6-month emergency fund first
- Clear high-interest debt (credit cards, personal loans 14%+)
- Split surplus 50:50 between loan prepayment and SIP
- Use bonuses for lumpsum loan prepayments
- Once loan is below 5 years, shift 80% to SIP
- After loan closure, redirect full EMI to SIP for wealth acceleration