How each one actually works
Prepayment applies a lump sum you already have directly against your outstanding principal, with your current lender, at your current interest rate. Every future EMI then calculates interest on a smaller balance, so the savings come purely from reducing principal sooner — it doesn't require your rate to be uncompetitive.
Balance transfer moves your entire outstanding loan to a new lender offering a lower interest rate. Your principal doesn't change, but the rate applied to it does — for a one-time transfer/processing fee. It's the right tool specifically when your current rate is higher than what's available elsewhere, not a substitute for having surplus cash.
Prepayment — a worked example
On a ₹30,00,000 loan at 8.5% for 240 months, adding ₹5,000 extra to every EMI cuts the tenure from 240 to 164 months and reduces total interest from about ₹32,48,327 to about ₹20,75,271 — an interest saving of roughly ₹11,73,056, funded entirely from your own cash flow, with (typically) no fee on floating-rate loans.
Balance transfer — a worked example
On a ₹30,00,000 outstanding balance with 180 months remaining, moving from a 9.5% rate to an 8.0% rate — with a ₹15,000 transfer fee — reduces total remaining interest from about ₹26,38,813 to about ₹21,60,521, a net saving (after the fee) of roughly ₹4,63,292, without needing any extra cash from you beyond the one-time fee.
So which saves more?
In the examples above, prepayment saves considerably more in absolute rupees — but that's because it assumes you actually have ₹5,000/month of spare cash to commit, on top of your existing EMI. Balance transfer's saving comes essentially "for free" (aside from the one-time fee) if a genuinely cheaper rate is available, since it doesn't require extra monthly cash flow. The fairer comparison isn't which technique is better in the abstract — it's which one matches your actual situation: surplus cash you can commit (favors prepayment), or a rate gap you can exploit without extra cash (favors balance transfer).
They also aren't mutually exclusive: transferring to a lower rate first, then continuing to prepay when you have surplus cash, compounds both savings.
When balance transfer isn't worth it
If very little tenure remains, most of your EMI is already going toward principal rather than interest, so a lower rate has little left to act on — the transfer fee may not be worth it. Balance transfer is most valuable earlier in a long tenure, where more interest remains to be saved.