Is paying off a loan early worth it? How to compare it properly
The answer depends on three numbers: the loan rate, the return you could earn by keeping the money, and the prepayment fee.
Short answer
Paying early usually pays off when the loan rate is higher than the return you could reliably earn by keeping the money, after the prepayment fee. But keep an emergency fund first — money paid into a loan cannot be taken back out.
This article is for general information, not financial, investment or legal advice. All figures are rounded illustrations; your situation may differ.
Compare the loan rate with what the money could earn
An illustration: you have VND 100 million spare and the loan charges 10% a year. Paying it in saves about VND 10 million of interest on that principal in the first year. Kept in a 5% savings account, the same money earns about VND 5 million.
The return to compare must be one you can reliably get, like a savings rate. Expected returns from stocks or funds swing up and down and are not a like-for-like match for interest you are certain to owe.
Count the prepayment fee
Many loans charge a fee for paying early, usually a percentage of the amount. A 2% fee on VND 100 million is VND 2 million, paid up front. Check the contract: the fee often shrinks with the years since the loan started.
Teaser rates only last the first few years before floating. Compare using the rate you will actually pay in the coming years, not just today’s promotional rate.
Keep an emergency fund before you pay
Money paid into a loan cannot be pulled back out in an emergency. Many people keep a few months of spending aside first, and only then consider paying the loan down with what is left.
There are two ways to prepay: keep the term and lower the monthly payment, or keep the payment and finish sooner. They lead to different total interest.
Work it out for your own situation
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