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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Caselet: Mr. Arjun Nair has a home loan with Rs 40,00,000 outstanding, 9% p.a. floating rate, and monthly interest computed on the reducing balance. He prepays Rs 4,00,000 and asks the adviser to keep the EMI unchanged. Which outcome is most accurate?

Prepaying while keeping the EMI unchanged reduces the tenure. Interest on the lower balance is smaller, so more of every EMI repays principal and the loan closes sooner. The rate does not change and the tenure does not lengthen.

  1. AThe tenure reduces because more of each EMI goes to principal after the prepaymentCorrect
  2. BThe tenure stays the same and the interest rate falls
  3. CThe tenure increases because outstanding principal has fallen
  4. DThe EMI automatically rises to match the lower principal

Explanation

With a lower outstanding balance, monthly interest is smaller. With the EMI unchanged, a larger part goes to principal, so the loan closes earlier. Tenure cannot increase, and the rate is unaffected by prepayment.

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