While it’s never a bad idea to get rid of debt as soon as possible, you should first
consider whether you can invest your surplus monthly cash and earn a greater return
than the interest cost of your loan.
If your debt has a higher interest rate than what you’d expect to earn from an
investment, then you should always pay down your loan first. However, if you’ve locked
in a really low interest rate, can afford your monthly payments, and have opportunities
to earn more than your loan’s interest rate then it’s smart to consider investing.
Before making your decision, you should consider other factors such as tax deductions
on interest expense, impact of rising interest rates on a variable rate loan, and
riskiness of the investment.
Is Interest Tax Deductible?
This is the tax rate withheld on your last year’s tax return.
Click here for a tax table.
Amount Earned Investing
Amount Saved Prepaying Loan Off
PREPAY or INVEST?
What are the assumptions used in this calculator?
The amount saved by prepaying assumes that once the loan has been prepaid, the extra money you
have each month plus the monthly payments saved is invested. For example, if applying $100 a
month extra to your loan payment results in eliminating 10 monthly payments, the calc assumes
that you invest the $100 plus your original monthly payment for those 10 months at the estimated
investment rate of return. The amount earned on investing is taxed as capital gains, which is
lower than your income tax. If it’s taxed as regular income, chances are that the after-tax
return on investment is lower than the one shown above.
What does it mean?
Based on your inputs, it appears that you would be better off paying down your debt as
rapidly as possible. You’re expected to save $xxx
in interest expense and eliminate xx monthly payments.
Your expected savings are $XXX more than the
$XXX you’re expected to earn if you invested the extra cash.
Based on your inputs, it appears that you would be better off investing the extra money
while continuing to make your scheduled monthly loan payments. By investing the
$xxx each month at
x.x%, you would earn
$xxx over the remaining life of your loan.
Your expected earnings are $xxx more than
the $xxx you’re expected to save if you
applied the extra cash to your loan payments each month.