₹50 lakh, 8.75%, 20 years, ₹10,000 extra, 12% SIP
Prepaying ends the loan 7 yr 2 mo early and saves ₹22.7 lakh. Wealth: ₹74.1 lakh if you prepay, ₹99.9 lakh if you invest. SIP ahead by ₹25.9 lakh on these assumptions.
EMI vs SIP calculator
Both choices use the same extra money every month. Prepaying shortens the loan, and once it is gone the old EMI plus the extra goes into a SIP. The SIP return is a steady assumption, which real markets are not, and no tax on gains is taken off.
50 lakh
%
years
10 thousand
%
Investing in a SIP comes out ahead by
₹25,86,382
Measured at the end of the original loan, 20 yr 0 mo from now. Prepaying clears the loan 7 yr 2 mo early and saves ₹22,71,325 in interest.
- Wealth if you prepay
- ₹74,05,097
- Wealth if you invest
- ₹99,91,479
- Interest saved by prepaying
- ₹22,71,325
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Prepay or invest: how to think about it
The debate is old. One camp says clear the loan, since debt is a sure cost. The other says a long SIP in equity funds beats loan rates, so invest instead. Both are right in some conditions, and the numbers decide.
Take a ₹50 lakh loan at 8.75% over 20 years, with ₹10,000 spare every month. Prepaying clears the loan about 7 years and 2 months early and saves around ₹22.7 lakh of interest. After the loan is gone, the old EMI plus the extra can go into a SIP. If you instead invest the ₹10,000 from the start at an assumed 12%, you end with roughly ₹99.9 lakh, against about ₹74 lakh from prepaying. On those assumptions the SIP leads by about ₹25.9 lakh.
That lead comes from one number, the 12% assumption. At 9% the gap would almost vanish, and a few bad years early on can reverse it. A loan at 8.75% is a risk-free 8.75% return on every rupee you prepay. For a SIP to beat that after tax and after volatility, you need a long horizon and the nerve to stay in.
A sensible middle: keep an emergency fund, take any free money the employer offers, and then split the spare cash. If the loan rate is above 9.5%, lean to prepaying. If it is under 8% and you have 10 or more years, lean to the SIP.
Sources
What this calculator does not account for
- Tax on SIP gains.
- Market swings, because the SIP return is a steady assumption.
- Loan tax deductions and prepayment charges.
How this is calculated
Formula: Two ways to use the same extra money
prepay: interest saved, then EMI + extra goes into a SIP; invest: extra goes into a SIP all alongWhat the symbols mean
- extraThe spare money you can put aside every month.
- returnExpected yearly return on the SIP, steady in the model.
Good to know
- Wealth is compared at the date the original loan would have ended.
- To test only the prepayment side, use the loan prepayment calculator.
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Worked examples
Each example is worked out by the same code as the calculator above.
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<iframe src="/embed/emi-vs-sip-calculator" title="EMI vs SIP" width="100%" height="720" style="border:0;max-width:42rem" loading="lazy"></iframe>Questions
Which is better, prepaying a loan or investing?
If the SIP return after tax is clearly above your loan rate, investing tends to win, but with risk. The loan saving is certain. Many people split the money.
Why does the tool assume a steady return?
To keep the comparison simple. Real markets swing, so over 5 or 7 years a SIP can lag a loan's guaranteed saving.
Does the home loan tax benefit change the answer?
Interest up to ₹2 lakh a year is deductible under the old regime, which lowers your effective loan rate a little. Check with the home loan tax benefit calculator.
Should I keep an emergency fund first?
Yes. Money put into a loan cannot be taken back out, and a SIP can be redeemed. Keep six months of expenses aside before either.