When a lump sum arrives, the question is whether to pay down the loan or put it on deposit. “If the deposit rate beats your loan rate, don't pay it down” is the rule people repeat — but that sentence leaves out tax.
So this article answers three things. Which side wins and by how much, whether paying it all off is safe, and what order to do things in. Rates come from the Korea Federation of Banks' disclosures, the tax rates from the statutes, and the arithmetic is ours.
In today's market, paying down wins by 4.74m won
Taking the July 2026 disclosures and pairing the cheapest loan with the best deposit, on 100 million won held for five years:
| 100m won · 5 years (loan 4.29% / deposit 3.95%) | Amount |
|---|---|
| Loan interest paid out | 21.45m won |
| Deposit interest received, after tax | 16.70m won |
| Five-year result | −4.74m won |
The 4.29% is the lowest average household loan rate of any bank, and 3.95% is the highest deposit rate available with every preferential condition met. Even that best-case pairing loses 4.74m won over five years.
Bank by bank, every row points the same way.
| Average household loan rate (July 2026) | Break-even deposit rate after tax | Against the best deposit (3.95%) |
|---|---|---|
| NH Nonghyup 4.29% (lowest) | 5.07% | 1.12pp short |
| Hana 4.45% | 5.26% | 1.31pp short |
| Woori 4.58% | 5.41% | 1.46pp short |
| KB Kookmin 4.63% | 5.47% | 1.52pp short |
| Shinhan 5.19% | 6.13% | 2.18pp short |
No combination available in July 2026 makes holding the money the better move. That said, this is one month of disclosures — if rates cross over, so does the conclusion. Which makes the formula in the next section more durable than the table.
Pull out just the shortfall column and all five rows point the same way.
Why: the deposit rate has to beat the loan rate by 18%
The reason is simple. Deposit interest is taxed; loan interest is not reduced. A 3.5% deposit does not put 3.5% in your hand, while a 3.5% loan takes the full 3.5% out. That asymmetry lifts the threshold.
The formula. After-tax interest = pre-tax interest × (1 − tax rate). Breaking even needs deposit rate × (1 − 0.154) = loan rate, so —
break-even deposit rate = loan rate ÷ 0.846 = loan rate × 1.182
So the deposit rate has to run about 18% above the loan rate just to draw level. By loan rate:
| Loan rate | Break-even deposit rate (pre-tax) | Gap |
|---|---|---|
| 2.5% | 2.96% | +0.46pp |
| 3.0% | 3.55% | +0.55pp |
| 3.5% | 4.14% | +0.64pp |
| 4.0% | 4.73% | +0.73pp |
| 5.0% | 5.91% | +0.91pp |
| 6.0% | 7.09% | +1.09pp |
The 15.4% is two statutes added together. Income Tax Act article 129 sets 14% on other interest income, and Local Tax Act article 103-13 adds local income tax at 10% of the withheld income tax. 14% + (10% of 14%) = 15.4%. So the 1.4% is not a separate rate but “10% of the 14%.”
For a feel of it, on 100 million won over five years:
| Case | Loan interest out | Deposit interest in, after tax | Five-year result |
|---|---|---|---|
| Loan 4.0% / deposit 3.5% | 20m won | 14.8m won | −5.2m won |
| Loan 3.5% / deposit 3.5% | 17.5m won | 14.8m won | −2.7m won |
| Loan 3.0% / deposit 3.5% | 15m won | 14.8m won | −0.2m won |
Look at the last row. The deposit rate sits 0.5pp above the loan rate and the five-year result is still essentially zero. “The deposit pays more, so hold the money” turns out to hover around break-even. Run your own figures through the loan interest calculator and the deposit maturity calculator.
Draw that worked table and the last row stands out.
So should you clear the whole thing?
On the arithmetic, yes. But two things are missing from it: an emergency cushion, and the early repayment fee.
On the cushion, the US Consumer Financial Protection Bureau ran an experiment with 551 participants. Given a hypothetical person with $5,000 of credit card debt and savings of $1,000 to $10,000, they were asked how much of the savings to put toward the debt.
“Most participants only paid off all of the credit card debt when savings were twice the amount of the debt.”
“In each scenario, more than 90% of participants used some savings toward the debt. On average they put more than half of savings toward it even when savings were only a fifth of the debt.”
— US Consumer Financial Protection Bureau, experiment summary (January 2021)
On the numbers, high-rate card debt should be cleared entirely. People keep a cushion anyway — and not irrationally, since clearing the debt to a zero balance means borrowing again, more expensively, when something goes wrong.
As for how much to keep, “three to six months of expenses” gets quoted as though it were official. It does not appear in the CFPB material.
“How much you need in an emergency fund depends on your situation.”
“Without savings, even a small financial shock can set you back, and if it turns into debt it can have a lasting impact.”
“Even a small amount provides some financial security.”
— US Consumer Financial Protection Bureau, guide to building an emergency fund (October 2025)
What the CFPB emphasises is having one rather than sizing one. Where to keep it is covered in the emergency fund article.
The second omission is the early repayment fee, which is not in the tables above. If one applies, it eats into that 4.74m won directly. Many loans waive it after three years, but terms vary — check the early repayment fee article and run yours through the calculator. This is where the result flips more often than anywhere else.
So the order goes like this
| Step | What | Basis |
|---|---|---|
| ① A minimum cushion first | Whether you have one matters more than how big. Without it, a shock becomes debt | CFPB material |
| ② Highest-rate debt next | Cards and cash advances | Conventional ordering |
| ③ Compare after tax | Hold the money only where the deposit rate clears loan rate × 1.182 | Our calculation |
| ④ Check the repayment fee | Subtract the cost of paying down and recalculate | Conventional ordering |
| ⑤ Then the long horizon | Money untouched for five years or more belongs to investing, not saving | CFPB material |
The five-year line in ⑤ is discussed in saving versus investing.
Above 20m won of financial income, the arithmetic changes
Everything above assumes the 15.4% withholding settles the matter. Once interest and dividends together pass 20 million won a year, it does not.
Income Tax Act article 14(3)6 — interest and dividend income whose combined total is 20 million won or less … shall not be aggregated in computing the global income tax base
Above that, the income joins global income and meets progressive rates of 6–45% alongside everything else. The after-tax return falls, so the range where paying down wins gets wider.
Note that the health insurance threshold is 10 million won — a different number entirely (Enforcement Rule of the National Health Insurance Act, article 44(1) proviso). It is covered in health insurance after retirement, and the two should not be mixed up.
Questions people ask
How much does paying down actually gain?
On July 2026 rates, 4.74m won on 100 million won over five years — even pairing the lowest loan rate (4.29%) with the highest deposit rate (3.95%). An early repayment fee reduces it.
Why subtract tax only from the deposit side?
Because loan interest generally carries no relief (mortgage interest deductions being a conditional exception). One side is taxed and the other is not, so a fair comparison has to be after tax.
What if the deposit is tax-exempt?
Then the 1.182 multiplier returns to 1.0, and any deposit rate above the loan rate wins. If you have tax-exempt or tax-favoured allowance left, filling that first is the right order.
Why not compare against investment returns?
A deposit return is fixed and an investment return is expected, which makes them hard to set side by side. The CFPB notes that investments “are not insured and you may lose some or all of your money due to market fluctuations.” Paying down debt is close to a guaranteed return, and that is the point of this comparison.
Is clearing the debt always right?
What the CFPB experiment shows is that people keep a cushion, because clearing everything and then meeting an emergency means borrowing more expensively. The optimum on paper and the choice you can live with are not always the same.
How long do these rates hold?
The Federation's disclosures are updated monthly, and a crossover reverses the conclusion. Remembering “deposit rate = loan rate × 1.182” outlasts the table.
The 3 August 2026 bill narrows this deduction. Relief on interest paid on a long-term mortgage would apply only where you actually live in the home (with exceptions for schooling, medical treatment and similar). A transitional rule is stated too — loans drawn before 2027 keep the current rules through 2029. Still a government bill; the full picture is in our guide to the 2026 tax reform bill.
Sources
- Korean Law Information Center — Income Tax Act, article 129 (withholding rates). Source for “other interest income … 14 per cent” in paragraph 1(1)(d). The same article sets 25% on non-business loan interest, 45% where the beneficial owner is not identified and 90% on unnamed income under the Real Name Financial Transactions Act, which is how we confirmed ordinary deposit interest falls under “other interest income.”
- Korean Law Information Center — Local Tax Act, article 103-13 (special collection). “Ten per cent of the income tax withheld” — the basis for the remaining 1.4% being 10% of the 14% rather than a separate rate.
- Korean Law Information Center — Income Tax Act, article 14 (computation of the tax base), paragraph 3(6). Basis for combined interest and dividend income of “20 million won or less” not being aggregated into the global income tax base.
- US Consumer Financial Protection Bureau — experiment suggesting people pay down debt but keep a savings cushion (January 2021). Source for the 551-participant design, “only paid off all of the credit card debt when savings were twice the amount of the debt,” “more than 90% of participants used some savings,” and “more than half of savings even when savings were only a fifth of the debt.”
- US Consumer Financial Protection Bureau — an essential guide to building an emergency fund (October 2025). Source for “how much you need depends on your situation” (that is, no figure is given), “even a small financial shock… lasting impact,” and “even a small amount provides some financial security.” The same agency's saving versus investing teaching material (2023) supplies the “long-term goals that take five years or more” dividing line and the warning that investments are not insured.
- Korea Federation of Banks consumer portal (bank-submitted disclosures compiled by the association) — household loan rates and deposit rate comparison (checked 29 July 2026). Source for the average household loan rates by bank (NH Nonghyup 4.29%, Hana 4.45%, Woori 4.58%, KB Kookmin 4.63%, Shinhan 5.19%), the best base rate without preferential conditions at 3.76% (Jeonbuk Bank JB Direct), and the best rate with all conditions met at 3.95% (SC First Bank e-Green Save).
- The results are our own calculation. The break-even deposit rates (loan rate × 1.182), the five-year results (−4.74m won and the rest) and the shortfalls by bank (1.12–2.18pp) were computed by us from the statutory rates and the disclosed rates; no agency publishes them. Simple interest, and no early repayment fee is included.
- What we read into it. “The deposit rate has to beat the loan rate by 18%” is what falls out of putting the two statutes into the formula; no source frames it that way. “Highest-rate debt first” is conventional but does not appear in the CFPB material we read, so the table marks it as conventional ordering rather than sourced.
Where to check further
This article goes as far as the statutes and the disclosures allow. The rest is best looked at here.
- Your actual rate — checked here, with your own bank. The loan rates above are bank averages and shift with credit score, income, collateral and product; deposit rates carry preferential conditions. Rates by credit score band are set out in the credit score article.
- The early repayment fee — read your loan agreement. It is large enough to reverse the result and varies by product.
- Financial income above 20m won — ask a tax professional. The aggregation threshold is confirmed from the statute, but how the withheld amounts are reconciled afterwards is outside this article.
As of the July 2026 disclosures. Tax rates are from the Income Tax Act and Local Tax Act, the experiment and emergency fund material from the CFPB, and the rates from the Korea Federation of Banks; the results are our own arithmetic on those figures. On refinancing, see switching your loan. This is general information, not investment or financial advice.
