Most people compare only interest rates when taking out a loan. But the total cost you actually bear varies a lot with the repayment method, the rate type and your prepayment plans. This article lists, in order, what to check when choosing a loan product (based on Korean rules).
The three repayment methods compared
| Item | Equal payment | Equal principal | Bullet |
|---|---|---|---|
| Monthly payment | Same every month | Large at first, then shrinking | Interest only, principal at maturity |
| Early burden | Medium | Largest | Smallest |
| Total interest | Medium | Lowest | Highest |
| Typical use | Mortgages | Mortgages | Credit and jeonse deposit loans |
Borrowing ₩100 million at 4.5% for 30 years, total interest is about ₩82.41 million with equal payment and about ₩67.69 million with equal principal. Equal principal costs about ₩14.7 million less, but the first month’s payment is about ₩146,000 higher.
Compare with your own numbers
Calculate loan interestChoosing the method that fits you
Equal principal suits people who
- Have room in their current income to handle the early burden
- May see their income fall in future (e.g. approaching retirement)
- Want to minimize total interest
Equal payment suits people who
- Want to manage the household budget around a fixed monthly amount
- Expect their income to rise, such as people early in their careers
- Want more breathing room in their early cash flow
When bullet repayment fits
It suits cases where the money to repay at maturity is already set (such as a deposit returned at the end of a jeonse lease, as with jeonse deposit loans), or where you plan to use the money briefly and repay as soon as you have a lump sum. Kept for a long time, the principal never shrinks and the interest burden is the largest.
Fixed vs variable rates
- Fixed rate: the rate doesn’t change for the loan term (or a set period). Safe when rates are rising, but usually starts a little higher than a variable rate.
- Variable rate: changes every 3 or 6 months with a benchmark such as COFIX. Better if rates fall, but the burden grows if they rise.
- Hybrid and periodic: fixed for about the first five years and variable afterward (hybrid), or reset every five years (periodic).
Nobody knows for sure whether rates will rise or fall. So it is safer to judge by “could I still make the payments if rates rose 1–2 percentage points?” Entering a rate 1 point higher in the calculator shows instantly how much the burden would grow.
Prepayment fees
If you repay principal earlier than the agreed maturity, the bank charges a prepayment fee. The usual structure is:
- It is usually waived after 3 years from the loan date.
- Even within 3 years, the fee shrinks as time passes.
- From early 2025, Korean financial institutions’ prepayment fees were adjusted to reflect actual costs and became lower than before. Check the exact rate in the product description.
If you expect a lump sum, choosing a product that lets you repay a set share each year without a fee is another option.
DSR: how much you can borrow
DSR (debt service ratio) is the share of your annual income taken up by the principal and interest on all your loans due over a year.
Korean banks cap individual DSR at 40% for loans above a certain size. For example, with ₩50 million in annual income you can borrow only as long as annual principal and interest payments don’t exceed ₩20 million. Credit loans or car financing reduce your mortgage limit accordingly.
On top of that, a “stress DSR” adds a premium for possible future rate rises, so the actual limit is smaller than a simple calculation suggests.
Ways to cut interest
- Right to request a rate cut: if your credit has improved after taking the loan — a raise or a promotion, for example — you have a legal right to ask the bank to lower the rate. You can apply easily in the bank’s app.
- Refinancing: switching to a lower-rate product. Online refinancing services let you compare many lenders’ rates at once. Check that it still pays after prepayment fees and other costs.
- Repaying principal with spare cash: a smaller principal means less interest on everything after. If the loan rate is higher than the deposit rate, repaying beats saving.
- Check preferential-rate conditions: don’t miss items that can lower the rate, such as salary deposits, card spending or automatic transfers.
References
- Financial Supervisory Service integrated financial product comparison
- Financial Services Commission press releases on household lending