Why does the calculator use a simple interest approximation?

Using loan balance × rate × years keeps the comparison quick and easy to understand. Exact interest savings on an amortizing loan depend on the full payment schedule and where you are in the term. For precise numbers, pair this with an amortization calculator.

Should I always choose the mathematically better option?

Not necessarily. The tool compares dollars only. Many people prefer the peace of mind and cash‑flow relief of being debt‑free even if investing might win by a small margin on paper.

How should I pick an investment return assumption?

Look at long‑term historical returns for the mix of stocks, bonds, and cash you actually plan to use, then choose a conservative number—especially if your timeframe is short. Overly optimistic assumptions can make investing look better than it realistically will be.

Does this account for taxes or deductibility of interest?

No. The calculator ignores income taxes, capital gains taxes, and any tax deductions for loan interest. Consult a tax professional if the tax treatment of your loan or investments is a major factor in your decision.

What if I want to split the lump sum between payoff and investing?

You can run multiple scenarios—one with the full lump sum to payoff, one with a partial payoff, and one investing the remainder—to see how different allocations change the trade‑offs.

finance calculator

Pay Off Loan or Keep & Invest?

Compare paying off a loan with a lump sum versus investing that lump sum at a target return to see which looks better over your chosen timeframe.

Results

Interest saved by payoff (approx): $100,000
Future value if invested: $90,970
Better option (payoff or invest): payoff

How to use this calculator

Enter your current loan balance and the loan’s annual interest rate (APR). This is usually listed on your statement or loan documents.
Enter the lump sum you have available to either pay down the loan or invest.
Enter an annual investment return assumption that reflects how you would realistically invest the money (for example, a conservative 4–6% for a balanced long‑term portfolio).
Choose how many years you want to compare the two options—your planning horizon for both interest savings and investment growth.
Review the approximate interest saved by paying off the loan versus the projected future value if you invest instead, along with which option looks better on pure dollars.
Run a few scenarios with different returns or horizons (short vs long) to see how sensitive the decision is to your assumptions.

Inputs explained

Loan balance: The remaining principal balance on your loan today. This is the amount you would need to pay off if you used your entire lump sum.
Loan interest rate (APR %): The annual percentage rate on your loan, before fees. Higher rates generally make paying off debt more attractive relative to investing.
Lump sum available: The amount of cash you have on hand that you could either use to pay down the loan or invest. The calculator assumes you contribute this lump sum all at once at the start.
Investment annual return (%): Your assumed average annual return if you invest the lump sum. Choose a realistic, long‑term estimate based on your risk tolerance and investment mix, not a best‑case scenario.
Years to compare: The time horizon you want to use for both sides of the comparison. Over longer horizons, compounding can magnify the difference between paying off and investing.

How it works

We start with your remaining loan balance, annual interest rate, and comparison horizon in years. To keep things quick and easy to understand, the calculator uses a simple interest approximation: interest saved ≈ loan balance × rate × years.

This interest‑saved number represents the rough amount of interest you might avoid over the comparison period if you wiped out the loan today with your lump sum instead of carrying the balance.

On the investing side, we treat your lump sum as a one‑time contribution invested at your chosen annual return. We convert that annual return into a monthly rate and compound the lump sum monthly over the same number of years.

The result of that compounding is the projected future value of your invested lump sum—what it could grow to if you earned that return consistently and left the money untouched.

Finally, we compare the approximate interest saved from payoff against the investment future value. If the investment appears larger, the calculator flags “invest” as the better option; if the interest savings are larger, it flags “payoff.”

Because this tool uses simplified approximations and ignores risk, taxes, and amortization details, treat the output as a directional guide, not a guarantee.

Formula

Approximate interest saved ≈ Loan balance × (Loan APR as decimal) × Years\n\nInvestment future value ≈ Lump sum × (1 + r/12)^(Years × 12)\nwhere r is the annual investment return as a decimal.\n\nBetter option =\n  "invest" if Investment future value > Approximate interest saved,\n  "payoff" otherwise.

When to use it

Deciding whether to use a bonus, inheritance, tax refund, or equity‑cash‑out to pay off a mortgage, student loan, or auto loan versus investing the money in a brokerage or retirement account.
Explaining trade‑offs between being debt‑free sooner and the potential growth of long‑term investments to a spouse, partner, or client.
Testing different scenarios (for example, high‑interest personal loan vs low‑rate mortgage) to see when paying off debt clearly dominates investing, and when the decision is less obvious.
Planning how to allocate a lump sum between multiple goals—such as partially paying down a loan while investing the rest—by understanding the extremes first.
Helping you visualize the opportunity cost of keeping a cheap loan if you can invest at a higher expected return over a long horizon.

Tips & cautions

Treat the investment return assumption conservatively—especially if you are risk‑averse or your timeframe is short. High assumed returns will always make investing look better on paper.
Remember that paying off debt delivers a guaranteed, risk‑free “return” equal to the interest rate you no longer pay. Investing comes with volatility and no guarantees.
Use your actual amortization schedule or a detailed loan payoff calculator if you need a precise interest‑saved figure. This tool is intentionally fast and approximate for high‑level decisions.
Consider your cash‑flow needs. Even if investing wins slightly on paper, freeing up a monthly loan payment may improve your day‑to‑day financial resilience.
Run separate scenarios for after‑tax realities. For example, if investment gains are taxed or your loan interest is deductible (or not), the effective comparison can shift.
Interest saved is calculated using a simple linear approximation (loan balance × rate × years); actual savings from a real amortizing loan will differ, especially if you are near the beginning or end of the term.
Does not model changing interest rates, varying payments, prepayment penalties, or refinancing costs.
Does not account for investment risk, volatility, or the possibility of negative returns—even if you enter a positive average return.
Ignores taxes on investment gains, potential tax deductions for loan interest, and other personal tax factors.
Assumes you can and will invest the entire lump sum immediately and leave it invested for the full period without withdrawals.

Worked examples

Comparing a 6% loan to a 5% investment

Loan balance = $40,000 at 6% APR, lump sum = $20,000, years = 10, investment return = 5%.
Approximate interest saved by payoff ≈ 40,000 × 0.06 × 10 = $24,000.
Investing $20,000 at 5% compounded monthly for 10 years gives a future value of about $32,578.
Interpretation: on pure dollars, investing slightly wins, but the difference versus guaranteed 6% savings may or may not justify the risk.

High‑rate debt vs moderate investment return

Loan balance = $15,000 on a personal loan at 12% APR, lump sum = $15,000, years = 5, investment return = 6%.
Approximate interest saved ≈ 15,000 × 0.12 × 5 = $9,000.
Investing $15,000 at 6% for 5 years grows to roughly $20,073, so growth over principal is about $5,073.
Interpretation: here, paying off the 12% loan clearly wins on dollars saved versus investment growth at 6%.

Low‑rate mortgage vs long‑term investing

Mortgage balance = $200,000 at 3.5% APR, lump sum = $50,000, years = 20, investment return = 7%.
Approximate interest saved ≈ 200,000 × 0.035 × 20 = $140,000.
Investing $50,000 at 7% for 20 years grows to around $193,000.
Interpretation: on dollars alone, investing looks more attractive, but you must weigh risk, taxes, and the psychological benefit of a smaller or fully paid mortgage.

Deep dive

Use this pay‑off‑loan‑or‑invest calculator to compare the approximate interest you could save by wiping out a loan today with the potential future value of investing that same lump sum over time.

Enter your loan balance, interest rate, lump sum, and an investment return assumption to see which choice looks better over your chosen number of years—paying off debt or keeping the loan and investing instead.

Great for evaluating what to do with a bonus, inheritance, or savings when you also carry mortgages, student loans, or auto loans. Remember to pair the dollar comparison with your own risk tolerance and peace‑of‑mind preferences.

FAQs

Why does the calculator use a simple interest approximation?: Using loan balance × rate × years keeps the comparison quick and easy to understand. Exact interest savings on an amortizing loan depend on the full payment schedule and where you are in the term. For precise numbers, pair this with an amortization calculator.
Should I always choose the mathematically better option?: Not necessarily. The tool compares dollars only. Many people prefer the peace of mind and cash‑flow relief of being debt‑free even if investing might win by a small margin on paper.
How should I pick an investment return assumption?: Look at long‑term historical returns for the mix of stocks, bonds, and cash you actually plan to use, then choose a conservative number—especially if your timeframe is short. Overly optimistic assumptions can make investing look better than it realistically will be.
Does this account for taxes or deductibility of interest?: No. The calculator ignores income taxes, capital gains taxes, and any tax deductions for loan interest. Consult a tax professional if the tax treatment of your loan or investments is a major factor in your decision.
What if I want to split the lump sum between payoff and investing?: You can run multiple scenarios—one with the full lump sum to payoff, one with a partial payoff, and one investing the remainder—to see how different allocations change the trade‑offs.

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This payoff‑or‑invest calculator is an educational tool that uses simplified interest and growth assumptions. It does not provide personalized financial, tax, or investment advice. Actual outcomes will depend on your specific loan terms, market returns, taxes, risk tolerance, and behavior. Consider speaking with a qualified financial professional before making major payoff or investment decisions.