Get a bonus or spare cash and you think, "should I pay down the loan?" Then you hit the prepayment fee. Is paying early a win, or a loss after the fee? Here's how to check.
See how much interest early payoff saves → shorten the term in the loan calculator and compare "total interest."
What is a prepayment fee?
A fee banks charge when you repay before the agreed period (usually 3 years). Roughly:
Fee = prepaid principal × fee rate × (remaining period ÷ agreed period)
The rate is typically 0.5–1.4%, and it's usually waived after 3 years. It also shrinks as the remaining period shrinks.
Deciding if it's worth it
- Past 3 years — no fee, so paying down saves interest with no downside.
- Within 3 years — compare "future interest" vs. "fee now." The longer the term left and the higher the rate, the more often paying (even with the fee) wins.
- Multiple loans — pay the highest-rate one first.
Before you prepay
- Keep an emergency fund — draining it to repay means costlier borrowing when something comes up.
- Partial payments help too — even paying some cuts later interest.
- Fee-free allowance — some loans let you prepay a yearly amount without a fee; check.
FAQ
If there's a fee, is it always better not to prepay?
No. If future interest far exceeds the fee (say 1% of the balance), paying wins. Compare the numbers.
Prepay vs. invest the cash?
If your loan rate beats your expected return, paying down is a guaranteed win — a loan rate is a locked-in negative return.
Prepayment is "fee vs. future interest." Past 3 years, or with lots of interest left, paying early usually wins.
This is general information, not a product recommendation or financial advice. Fee rates and waivers vary — confirm with your lender.
