Extra Loan Payment vs Investing the Extra
Same extra dollar each month — pay the loan down or invest it — and compare net worth at a horizon, including leftover debt.
By Greg, Editor at Finance Maxx. Published · Updated
Once the minimum is covered, the next dollar can retire debt faster or buy investments. That is a net-worth question at a horizon, not a slogan.
How the compare works
The extra payment vs invest tool runs two monthly paths to the same horizon:
- Pay extra on the loan. After payoff, the former minimum + extra is invested.
- Invest extra while paying only the minimum. After payoff, both streams are invested.
Net worth is invested assets minus leftover debt. If the minimum does not cover interest, the extra-to-loan path is marked infeasible — raise the payment.
Guaranteed vs modeled return
Paying down a 22% APR card is a 22% guaranteed after-tax return on that dollar (you no longer owe 22%). A 7% portfolio assumption does not beat that in this model, and markets can return less than 7%.
A 6% mortgage is different. Extra principal still earns a 6% guaranteed return, but a diversified portfolio might earn more over a long horizon. It also might not, especially in the first decade, and mortgage interest may be deductible if you itemize. This compare does not model the deduction; if you itemize, the after-tax mortgage rate is lower than the APR.
Cash floor first
Do not empty checking to win a model. Keep a cash buffer so the next shock does not reopen the debt. Then run this compare inside the paying off debt playbook.
See also how extra payments cut debt for the monthly interest loop on a single balance.
Try it
Horizon and leftover debt
If the horizon is shorter than payoff on the minimum-only path, the invest path still carries the loan. Net worth subtracts that balance. A pretty investment line next to a still-large card is not winning. Lengthen the horizon until both stories have finished the debt, or accept that you are comparing a leveraged household to a less-leveraged one.
Prepayment penalties and 0% promo windows are not in the model. If a promo is about to expire, the APR you type should be the rate you will actually pay.
Enter a real statement APR and a realistic extra dollar. Try 7% and 4% modeled returns. If the verdict flips with the return, you do not have a sure thing — you have a risk preference.