Does this calculator account for taxes or mortgage interest deductions?

No. It compares pre‑tax interest savings to pre‑tax investment growth. Actual after‑tax results can differ, especially for deductible interest or taxable investment accounts. Consider tax effects separately or talk with a tax professional.

What investment return should I use?

There’s no single correct answer. Many people test conservative, moderate, and aggressive assumptions (for example, 3%, 5%, 7%) to see a range of possible outcomes based on their risk tolerance and investment mix.

Can I split my extra cash between prepaying and investing?

Yes in practice, but this tool models an either/or choice for clarity. To approximate a split, you can run one scenario with a smaller extra payment amount and treat the remainder as investing outside the tool.

Is paying down debt always the safer option?

Paying down debt gives you a guaranteed return equal to the loan’s interest rate (after tax), which is very safe compared with uncertain market returns. But you also need to consider liquidity, emergency savings, and employer matches when deciding what’s best for your overall plan.

Should I decide solely based on which number is bigger?

Not necessarily. The larger dollar figure is one data point, but risk, time horizon, comfort with debt, and other goals (like building an emergency fund) are just as important. Use this calculator as a guide, not a rigid rule.

finance calculator

Prepayment vs Investment

Compare making an extra monthly loan payment to investing that same amount to see months saved, interest saved, and investment growth.

Results

Base monthly payment: $1,799
Payoff months (standard): 360
Payoff months (with extra): 279
Months saved: 81
Interest saved: $91,173
Future value if invested instead: $105,130
Better option: invest

How to use this calculator

Enter your current loan balance, interest rate, and remaining term in years.
Enter the extra monthly payment you could afford to either prepay or invest.
Enter an assumed annual investment return for the investing scenario.
Review the base payment, payoff months with and without extra, months saved, and total interest saved from prepayments.
Review the future value of investing the extra payment and the better option indicator to see which side wins under your assumptions.
Experiment with different extra payment amounts and return assumptions to understand how sensitive the comparison is to changes in the inputs.

Inputs explained

Loan balance: The current outstanding principal balance on the loan you’re evaluating—often a mortgage, auto loan, or student loan.
Loan interest rate (APR %): The loan’s annual percentage rate. This is effectively the “return” you lock in by paying that debt down faster, before considering taxes.
Term (years): The remaining term of the loan in years. If you’re partway through, use the remaining time rather than the original term to keep results realistic.
Extra monthly payment: The additional amount you could send toward your loan’s principal each month. In the investing scenario, this same amount is treated as a monthly contribution to an investment account instead.
Investment annual return (%): Your assumed average annual return if you invest the extra money. The calculator compounds this return monthly when computing the investment future value.

How it works

You enter loan details (balance, interest rate, and remaining term), an extra monthly payment amount, and an assumed annual investment return.

We compute the standard amortized monthly payment and simulate the loan payoff with no extra payments to get payoff months and total interest paid under the baseline.

We then simulate the loan again with the extra payment added to principal each month, showing the accelerated payoff months and total interest paid with prepayments.

Interest saved is the difference between total interest in the standard schedule and total interest when you make extra payments.

For the investing path, we assume you invest the extra amount each month at the entered annual return (converted to a monthly rate) over the time it takes to pay off the loan with extra payments.

The calculator compares interest saved from prepaying with the investment future value and uses that comparison to label a simple “better option” in this simplified framework.

Formula

High-level logic:\n\n1. Base schedule: compute standard amortized payment; simulate month by month to get payoffMonthsStandard and totalInterestStandard.\n2. Extra schedule: add extraPayment to each monthly payment; simulate to get payoffMonthsWithExtra and totalInterestWithExtra.\n   • MonthsSaved = payoffMonthsStandard − payoffMonthsWithExtra.\n   • InterestSaved = totalInterestStandard − totalInterestWithExtra.\n3. Investing path: invest extraPayment monthly at annual return r.\n   • Monthly rate ≈ (1 + r)^(1/12) − 1.\n   • InvestFutureValue ≈ extraPayment × [((1 + monthlyRate)^(payoffMonthsWithExtra) − 1) ÷ monthlyRate].\n4. Better option: compare InterestSaved vs InvestFutureValue to identify which strategy yields a higher dollar benefit in this simplified model.

When to use it

Deciding whether to send extra money to a mortgage or invest it in a brokerage or retirement account.
Comparing debt prepayment vs investing for student loans, auto loans, or other installment debt.
Illustrating the trade‑off between a guaranteed return from paying off high‑interest debt and the uncertain return of investing in markets.
Testing different extra payment amounts to see where additional debt prepayment provides diminishing returns in terms of months saved.
Providing a simple framework for discussing debt vs investing strategies with a financial coach, planner, or partner.

Tips & cautions

If your loan interest rate is significantly higher than your realistic after‑tax investment return, extra prepayments usually provide a better guaranteed benefit.
Run the calculator with several investment return assumptions (for example, 3%, 5%, 7%) to see how sensitive the result is to market performance.
Consider liquidity: funds used to prepay a loan are not easily accessible, while investments may be available in an emergency (though subject to market risk and potential taxes).
If you have access to an employer retirement match, treating that match as part of your effective investment return may tilt the decision toward investing.
Use this tool alongside a full review of your financial priorities, including emergency savings and higher‑interest debts, not as a one‑dimensional decision rule.
Ignores taxes on investment returns and potential tax benefits from loan interest (such as mortgage interest deductions), both of which can materially change the analysis.
Assumes a fixed-rate loan and constant payments; it does not model refinances, adjustable-rate loans, changing payment schedules, or prepayment penalties.
Uses a constant average investment return with monthly compounding; real investment returns vary over time and may be higher or lower than assumed.
Models a pure either/or choice—either all of the extra goes to prepayment or all goes to investing. It does not directly model split strategies.
Does not account for personal factors such as risk tolerance, job security, or psychological comfort with carrying debt vs building investments.

Worked examples

30‑year mortgage vs investing extra $200/month

Loan balance = $300,000; APR = 6%; term = 30 years; extra payment = $200/month; assumed investment return = 5% annually.
The calculator shows the standard payoff time and total interest, then the faster payoff time and interest savings with the extra $200 payment.
It also computes the future value of investing $200/month at 5% for the duration of the accelerated payoff period.
Comparing interest saved with the investment value highlights whether prepaying or investing looks stronger in this scenario.

High-interest personal loan at 12% vs investing at 5%

Loan balance = $15,000; APR = 12%; term = 5 years; extra payment = $100/month; assumed investment return = 5%.
Because the loan rate is much higher than the assumed investment return, the interest savings from prepaying tend to dominate.
The better option indicator will often favor prepaying in such high‑rate debt situations.

Low‑rate mortgage at 3% with higher investment return potential

Loan balance = $250,000; APR = 3%; term = 30 years; extra payment = $150/month; assumed investment return = 8%.
Interest savings from prepaying a low‑rate loan are smaller compared with potential investment growth at 8%.
In this case, the calculator may show a higher investment future value than interest saved, suggesting that investing could produce more value—if those returns are actually achieved.

Deep dive

Use this prepay vs invest calculator to compare making extra loan payments with investing the same cash at an assumed rate of return.

Enter loan balance, rate, term, extra monthly payment, and expected investment return to see payoff acceleration, interest saved, potential investment growth, and which option looks better under your assumptions.

Ideal for borrowers deciding whether to prioritize faster debt payoff or long‑term investing with extra monthly cash flow.

FAQs

Does this calculator account for taxes or mortgage interest deductions?: No. It compares pre‑tax interest savings to pre‑tax investment growth. Actual after‑tax results can differ, especially for deductible interest or taxable investment accounts. Consider tax effects separately or talk with a tax professional.
What investment return should I use?: There’s no single correct answer. Many people test conservative, moderate, and aggressive assumptions (for example, 3%, 5%, 7%) to see a range of possible outcomes based on their risk tolerance and investment mix.
Can I split my extra cash between prepaying and investing?: Yes in practice, but this tool models an either/or choice for clarity. To approximate a split, you can run one scenario with a smaller extra payment amount and treat the remainder as investing outside the tool.
Is paying down debt always the safer option?: Paying down debt gives you a guaranteed return equal to the loan’s interest rate (after tax), which is very safe compared with uncertain market returns. But you also need to consider liquidity, emergency savings, and employer matches when deciding what’s best for your overall plan.
Should I decide solely based on which number is bigger?: Not necessarily. The larger dollar figure is one data point, but risk, time horizon, comfort with debt, and other goals (like building an emergency fund) are just as important. Use this calculator as a guide, not a rigid rule.

Related calculators

finance

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.

finance

Payoff vs Borrow Comparison

Decide whether to pay cash for a purchase or borrow and invest your cash instead. See loan payments, interest paid, and potential investment growth.

This prepay vs invest calculator is an educational tool based on simplified loan amortization and investment growth assumptions. It does not account for taxes, risk, prepayment penalties, or your broader financial situation and is not financial, legal, or tax advice. Before making major decisions about debt payoff or investing strategies, review actual loan documents and investment options, and consider consulting a qualified financial or tax professional.