Should you pay off a 10% loan or invest?
Paying off a 10% loan earns you a guaranteed 10% return — no market, no risk. Investing offers a higher expected return (~7% in stocks) but with real risk. So the decision comes down to one comparison: 10% certain vs ~7% risky.
The rule of thumb, and where it breaks
A useful default: pay off any loan above about 6–7% before investing in a taxable brokerage, because few investments reliably beat that after tax and risk. Below that, investing tends to win on average. But the rule bends:
- Guaranteed beats risky. The loan payoff has zero volatility. Getting the same expected return in the market requires taking real risk — a bad decade can wipe out the paper advantage.
- Taxes and match come first. A 401(k) match (~100% instant) and tax-advantaged space usually beat both paying off a moderate loan and taxable investing.
- Behavior and cash flow. Clearing a loan frees up monthly cash and removes a psychological weight — worth a lot even when investing edges ahead on a spreadsheet.
Where your rate sits on the line
The whole decision is one comparison — your guaranteed rate against a ~7% expected market return — so it is worth seeing the entire ladder at once. On $50,000 over 30 years, 7% is the dead heat, and 8% is the first rate where clearing the debt clearly beats investing:
| Loan rate | Worth of paying it off | Worth of investing | Ahead by |
|---|---|---|---|
| 3% | $121,363 | $380,613 | Invest +$259,250 |
| 4% | $162,170 | $380,613 | Invest +$218,443 |
| 5% | $216,097 | $380,613 | Invest +$164,516 |
| 6% | $287,175 | $380,613 | Invest +$93,438 |
| 7% | $380,613 | $380,613 | Dead heat |
| 8% | $503,133 | $380,613 | Pay off +$122,520 |
| 9% | $663,384 | $380,613 | Pay off +$282,771 |
| 10% this page | $872,470 | $380,613 | Pay off +$491,857 |
| 12% | $1,497,996 | $380,613 | Pay off +$1,117,383 |
| 15% | $3,310,589 | $380,613 | Pay off +$2,929,976 |
The payoff column is a certainty; the investing column is an average outcome with real risk around it. A tie on this table is not a tie in practice — the guaranteed side wins ties.
This compares a guaranteed loan rate to a risky ~7% expected return; it isn't tax advice. High-interest debt (credit cards, many personal loans) should almost always be cleared before investing. Model your full picture in the calculator.
At double digits, the debt becomes the emergency
A 10% rate crosses an important line. Below it, paying off versus investing is a genuine judgment call; at double digits, the balance is compounding against you faster than a diversified portfolio can reasonably be expected to grow, so clearing it stops being optional optimization and becomes the priority.
At this rate the usual sequence still holds, but it tightens:
- Capture the full 401(k) match first — an instant partial return still beats 10%.
- Keep a basic emergency fund so a setback does not send new spending back onto high-rate credit.
- Then aim everything else at the balance, ahead of extra taxable investing or overpaying a low-rate mortgage.
The reason is plain arithmetic: every dollar sent to a 10% loan earns a certain 10%, while the same dollar invested earns an uncertain, taxable return that history says is usually lower. Waiting for the market to outrun a double-digit rate is a bet with the odds against you, and the loan keeps charging its rate the entire time you wait.
Common questions
Should I pay off a 10% loan or invest?
At 10%, pay the loan off first. Its guaranteed 10% return beats a typical ~7% risky stock return once you adjust for risk, and it frees up cash flow immediately.
What loan interest rate is worth paying off before investing?
A common threshold is about 6–7%. Above it, paying off the loan is a hard-to-beat guaranteed return; below it, investing tends to build more wealth on average. Always clear high-interest debt (credit cards) first.
Does paying off debt count as a return?
Yes — eliminating a 10% loan is economically identical to earning a guaranteed, tax-free 10% on that money. That's why high-rate debt is one of the best "investments" available.