Loan vs Invest Decision Helper
Compare paying off debt vs investing with after-tax analysis. Enter values for instant results with step-by-step formulas.
Formula
Net Benefit = After-Tax Investment Gain - After-Tax Loan Interest; Spread = Investment Return - Effective Loan Rate
Worked Examples
Example 1: Student Loan vs S&P 500
Problem:$50K student loan at 5%, 10-year term. Have $50K inheritance. Expected market return 8%. 24% tax bracket. Interest is tax-deductible.
Solution:Loan Analysis:\nMonthly payment: $530\nTotal interest: $13,639\nAfter-tax interest (24% bracket): $10,366\nEffective rate: 5% × (1-0.24) = 3.8%\n\nInvest Analysis:\n$50K at 8% for 10 years: $107,946\nGain: $57,946\nCapital gains tax (15%): $8,692\nAfter-tax gain: $49,254\n\nComparison:\nInvesting net: $49,254 - $10,366 = $38,888 ahead\n\nSpread: 8% - 3.8% = 4.2% (strong)\n\nRecommendation: Invest. Strong positive spread, and deductibility reduces effective loan cost significantly.
Result:Invest | $38,888 net benefit | 4.2% spread | Deductibility helps
Example 2: Car Loan - High Rate
Problem:$30K car loan at 9%, 5-year term. Have $30K savings. Expected return 7%. Not tax-deductible. 22% bracket.
Solution:Loan Analysis:\nMonthly payment: $623\nTotal interest: $7,376\nNo tax benefit (consumer debt)\nEffective rate: 9%\n\nInvest Analysis:\n$30K at 7% for 5 years: $42,077\nGain: $12,077\nAfter-tax gain: $10,265\n\nComparison:\nInvesting net: $10,265 - $7,376 = $2,889 ahead\n\nBUT spread is only 7% - 9% = -2%!\n\nMathematically, investing still ahead due to compounding,\nbut the negative spread means risk is not rewarded.\n\nRecommendation: Pay off loan.\nGuaranteed 9% return beats uncertain 7%.
Result:Pay Off Loan | Guaranteed 9% > uncertain 7% | Negative spread
Example 3: Mortgage - Low Rate
Problem:$300K mortgage at 3.5%, 30 years. Have $100K to either invest or pay toward principal. Expected return 8%. 32% tax bracket. Mortgage interest deductible.
Solution:Mortgage effective rate:\n3.5% × (1-0.32) = 2.38%\n\nInvest $100K at 8% for 10 years:\n$215,892 | After-tax gain: $98,508\n\nPay down mortgage:\nSaves ~$50K interest over 10 years (complex calc)\nGuaranteed 2.38% effective return\n\nSpread: 8% - 2.38% = 5.62% (very strong)\n\nOver 10 years, investing likely adds ~$48K more wealth than paydown.\n\nRecommendation: Invest, especially in tax-advantaged accounts.\nMortgage is cheapest debt most people have.\nMaintain liquidity for opportunities.
Result:Invest | 5.62% spread | Mortgage is cheap debt | Maximize tax-advantaged accounts first
Frequently Asked Questions
Should I pay off debt or invest?
Compare after-tax interest rate on debt vs expected after-tax investment return. If investment return > debt rate + 1-2% risk premium, investing may be better mathematically. But consider: debt payoff is guaranteed return; investments are uncertain. Risk tolerance matters.
How does tax deductibility affect the decision?
Deductible interest (mortgage, student loans, business) reduces effective rate. 6% mortgage at 24% tax bracket = 4.56% effective rate. Compare this lower effective rate to after-tax investment returns. Deductibility favors investing over payoff.
Does loan term affect the decision?
Longer terms mean more interest paid but also more time for investments to compound. Short-term loans favor payoff (less time for investment gains). Long-term low-rate loans favor investing (more compounding time).