Should You Save via RD or Increase EMI to Close Your Home Loan Faster?
Most home loan borrowers believe this strategy sounds smart: "I'll save ₹10,000 every month in an RD. At the end of the year, I'll break it and make a part-payment on my home loan." On paper, it feels disciplined and logical. In reality, it costs you more interest and delays freedom from debt.
Let's break this down using a real client case with actual numbers.
📊 The Real Case Study
🏠 Meet Rajesh - Home Loan Details
Extra Cash Available: ₹10,000/month
His Plan: Save in RD @ 7.40%, withdraw yearly for loan prepayment
🔍 Strategy Analysis: The Numbers Don't Lie
Option 1: Continue Normal EMI (Baseline)
- • Monthly EMI: ₹38,200
- • Total Amount Paid: ₹91.7 lakh
- • Total Interest: ₹47.7 lakh
- • Loan Closure: 20 years
Option 2: RD + Yearly Part-Payment Strategy
How it works:
- 1. Save ₹10,000/month in RD @ 7.40%
- 2. Annual RD maturity: ₹1,24,500
- 3. Use this for yearly loan prepayment
The Hidden Problem:
- • Borrowing Cost: 8.40% (loan interest)
- • Earning Rate: 7.40% (RD interest)
- • Tax Impact: RD interest is taxable
- • Opportunity Cost: Negative spread of 1%
Results over loan life:
- • Loan Tenure: Reduces to ~15-16 years
- • Total Interest Paid: ₹36-38 lakh
- • Interest Saved: ₹10-12 lakh
Better than doing nothing, but still suboptimal.
Option 3: Increase EMI by ₹10,000 (The Smart Move)
Simple Change:
- • Old EMI: ₹38,200
- • New EMI: ₹48,200 (₹10,000 increase)
Powerful Results:
- • Loan Tenure: Reduces to ~12.5 years
- • Total Interest Paid: ₹29.5 lakh
- • Interest Saved: ₹18.2 lakh
- • Loan Closure: 7+ years earlier
📈 The Comparison That Changes Everything
| Parameter | Normal EMI | RD + Part Payment | EMI Increase |
|---|---|---|---|
| Monthly Outflow | ₹38,200 | ₹48,200 | ₹48,200 |
| Loan Tenure | 20 years | 15-16 years | 12.5 years |
| Total Interest | ₹47.7L | ₹36-38L | ₹29.5L |
| Interest Saved | - | ₹10-12L | ₹18.2L |
🏆 Winner: EMI Increase saves ₹6-8L more than RD strategy!
🧠 Why EMI Increase Wins: The Science
1. Interest Arbitrage Works Against RD
When your loan rate (8.40%) > savings rate (7.40%), every day you delay prepayment costs money.
2. Monthly vs Yearly Compounding
RD Strategy: Interest saves once yearly
EMI Increase: Interest saves every single month
3. Tax Efficiency
RD Interest: Taxable (reduces effective return)
Loan Interest Saved: Tax-free benefit
4. Behavioral Simplicity
No RD tracking, no withdrawal timing, no temptation to divert funds
💡 When Does RD Strategy Make Sense?
Only in these rare scenarios:
- 1. Higher Returns: If RD/investment returns exceed loan interest
- 2. Very Low Loan Rates: Sub-7% home loans
- 3. Tax Benefits: If RD qualifies for tax deductions
For 99% of Indian home loans today: EMI increase is superior.
🎯 The Golden Rule of Debt Management
"Kill the costliest debt first, then invest freely."
If you can save monthly, prioritize eliminating expensive debt before building wealth.
🚀 Action Steps for Home Loan Borrowers
Step 1: Calculate Your Numbers
Use this formula: If Loan Interest Rate > Available Investment Returns, increase EMI
Step 2: Start Small
Even ₹2,000-5,000 EMI increase creates significant impact and saves lakhs in interest
Step 3: Automate
Set up auto-debit for increased EMI to remove behavioral barriers
🎯 Real Client Success Story
Before Strategy Change:
- • Loan: ₹44L @ 8.4% for 20 years
- • Plan: RD savings for yearly prepayment
- • Projected Interest: ₹36-38L
After Strategy Change:
- • Same loan with ₹10,000 EMI increase
- • Actual Interest Paid: ₹29.5L
- • Money Saved: ₹8.5L
- • Time Saved: 3-4 years
"I wish I had known this math earlier. The same discipline, but much better results!" - Rajesh
🔥 Key Takeaways
Same Cash Flow, Better Results
₹48,200 monthly in both strategies, but EMI increase saves ₹6-8L more
Time is Money
Become debt-free 3-4 years earlier
Simplicity Wins
Less complexity, better outcomes
Math Over Emotions
Numbers don't lie - higher loan rates demand immediate action
🎯 Ready to Optimize Your Home Loan Strategy?
At PlanUrDream, we help you calculate exact interest savings for your loan, compare EMI increase vs investment strategies, create personalized debt elimination plans, and track your progress toward financial freedom.
Don't let mathematical inefficiency cost you lakhs.
Disclaimer: This analysis is for educational purposes. Consult with certified financial planners for personalized advice based on your specific situation.
Share this post with friends who have home loans - you might save them lakhs! 💰