Prepay loan or invest? A calculator to compare
If you have spare money each month, should it go to the loan or to investments? This calculator compares the two ways over the rest of the loan term.
How to use this calculator
- Enter the loan balance, the interest rate and the years left.
- Enter the extra amount you can spare every month.
- Enter the return you expect on investments, after tax. Try a low and a high figure.
- Compare the money you would have at the end, and note the break-even return.
Worked examples
Example 1
A ₹30,00,000 balance at 9% for 15 more years, ₹15,000 spare a month, 10% expected return after tax.
You enter
| Loan balance outstanding | ₹30,00,000 |
|---|---|
| Loan interest rate (per year) | 9% |
| Years left on the loan | 15 |
| Extra money you can spare each month | ₹15,000 |
| Return you expect on investing, after tax (per year) | 10% |
You get
| Prepay: money you have at the end | ₹59,10,028 |
|---|---|
| Invest: money you have at the end | ₹62,17,055 |
| Better under these numbers | Investing by ₹3,07,027 |
| Loan interest saved by prepaying | ₹13,19,846 |
| Return at which the two are equal | 9% a year |
Example 2
The same with a cautious 7% return.
You enter
| Loan balance outstanding | ₹30,00,000 |
|---|---|
| Loan interest rate (per year) | 9% |
| Years left on the loan | 15 |
| Extra money you can spare each month | ₹15,000 |
| Return you expect on investing, after tax (per year) | 7% |
You get
| Prepay: money you have at the end | ₹52,41,977 |
|---|---|
| Invest: money you have at the end | ₹47,54,434 |
| Better under these numbers | Prepaying by ₹4,87,542 |
| Loan interest saved by prepaying | ₹13,19,846 |
| Return at which the two are equal | 9% a year |
How it works
Prepaying earns a certain 'return' equal to the loan rate, because it stops that interest. Investing might earn more or less, can lose money in a bad stretch and is usually taxed. The break-even return shows how much investing must earn after tax to match prepaying.
In the prepay case, once the loan is cleared the whole EMI plus the extra is invested for the remaining months, so the freed money is not wasted. Taxes, prepayment charges, tax benefits on interest and your need for emergency cash are not modelled.
Formula
Both paths run for the original loan term. Prepay: pay EMI + extra to the loan, then invest the whole amount once it is cleared. Invest: pay the EMI and invest the extra every month.
Common questions
Which is better?
It depends on the loan rate, your expected return and how much risk you will accept. A guaranteed saving is worth more than an uncertain gain.
Should I keep an emergency fund first?
Most planners suggest so.
What about tax benefits on the loan?
They change the effective loan rate; lower the rate here to reflect them.
Learn more
Read the lesson Understanding and managing debt on pusaram.com for the ideas behind this calculator.
Calculators give estimates for learning and planning. They are not financial, tax, legal or medical advice, and results depend entirely on the numbers you enter. Check rates, limits and rules with an official source or a qualified professional before acting.