What early repayment really buys

Paying off debt early feels unambiguously good. The arithmetic is less tidy, and the untidy part is the one that matters.

1The visible half

A loan of 150 000 at 14 per cent with two years left. Paying it off today saves roughly 22 000 in interest. That number is real and it is the number everyone quotes.

2The half nobody writes down

To pay it off you hand over 150 000 that was sitting as a reserve. The reserve was not earning much — call it nothing. So the trade looks free. It is not free, because the reserve was not there to earn. It was there to stop one bad month from becoming a new loan at a worse rate.

If a bad month arrives after the reserve is gone, the replacement borrowing is rarely at 14 per cent. It is at whatever is available quickly, which is always worse.

The reserve does not pay interest. It pays for not needing a worse loan later.

3Where the line falls

The honest version is a split. Keep the reserve at whatever covers three months of fixed costs, and put everything above that line against the loan. That gets most of the interest saving and keeps the thing the reserve was for.

It is slower and less satisfying than clearing the debt in one move. It also fails less often, which is the only test that counts.

Last reviewed 2026-10-18.