Invest vs. Prepay Calculator

Roughly the loan APR, but slightly higher because cash-flow timing favors prepay early in the simulation. The calculator computes a precise breakeven for your inputs — for a 6% loan over 20 years with $300/month extra, breakeven typically lands near 6.5-7%. If your investment account is a high-yield savings (~4%) or short-term Treasuries (~5%), the loan beats them. If it's a diversified equity portfolio expecting 8-10% long-run, the math leans toward investing. The trick is the word 'expected.' A guaranteed 6% return on prepayment is more certain than an expected 8% return on stocks, even though the expected value is higher.

Because in early months, the prepay path is destroying loan principal at the loan APR (a guaranteed return), while the invest path is putting smaller dollar amounts into a portfolio that hasn't compounded yet. The crossover happens later: once the prepay path has eliminated the loan, it starts investing the freed cash flow, but the invest path's portfolio has been compounding for years and has a head start. Whether the crossover happens within your horizon — and how big the gap ends up — depends on the spread between your loan APR and expected return. Wide spread + long horizon = invest wins big. Narrow spread + short horizon = prepay wins by a small margin.

Capture the match. Always. A typical 50% match on the first 6% of salary is an instant 50% return on the matched portion — better than any loan APR you're realistically carrying. The decision tree is: (1) capture full employer match in 401(k), (2) pay off any debt above ~7-8% APR, (3) decide invest vs prepay on what's left. This calculator is for step 3 — the comparison only makes sense after you've already taken the free money.

No, and that's a meaningful caveat. After-tax math can shift the breakeven by 1-2 percentage points either direction. Capital gains on investment growth cost 0-23.8% depending on your bracket and account type. Mortgage interest may be deductible if you itemize (most people don't post-2017 SALT cap). Student-loan interest deduction is capped at $2,500 and phases out at moderate income. The simplest correction: if your investments are in a Roth IRA or 401(k) and the loan isn't tax-advantaged, the calculator's answer is roughly right. If your investments are in a taxable brokerage and the loan is mortgage interest you deduct, the prepay side is overstated by a couple of percentage points.

Real markets don't return a constant 8% per year — they return +20%, then -10%, then +30%, then -25%, in a sequence. If you're contributing during a down market, you buy more shares at low prices (good). If you're drawing down during a down market, you sell more shares at low prices (bad). For someone choosing invest-vs-prepay over a long horizon, the sequence risk is asymmetric: prepay is path-independent (the loan APR doesn't care what year it is), while invest depends on which years are good and which are bad. The calculator assumes constant returns because modeling sequence risk requires Monte Carlo simulation and adds variance bands instead of a single answer — which most users would find harder to act on, not easier. The honest interpretation: the breakeven return rate is what you'd need on average, and 'on average' has a lot of dispersion.

Pay off the credit card. Don't run the calculator. At 22% APR, the loan APR is higher than any reasonable expected investment return after taxes and fees — the calculator will tell you to prepay every time, and the 'tie' point is somewhere out near 25-28% expected return, which isn't a real strategy. This calculator is most useful for the 4-9% APR debt range where the question is genuinely close: mortgages, student loans, auto loans, prime-rate personal loans. Above 10%, prepay wins decisively; below 4%, invest usually wins.