Should you pay off a 6% loan or invest?
Paying off a 6% loan earns you a guaranteed 6% 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: 6% 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.
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.
Right at the line where the rule of thumb runs out
This rate lands squarely in the zone planners flag as a true coin flip. A widely repeated rule of thumb says loans up in the mid-to-high single digits are usually worth paying off, while clearly lower rates favor investing, and a rate near the top of this range sits right on that dividing line. When a guaranteed payoff and an expected market return are this close, the expected-value case for investing gets thin, and the tie is broken by everything around the numbers.
What breaks it:
- Horizon: a long runway gives the market time to deliver its average; a short one leaves you exposed to a bad stretch.
- Tax treatment: matched or Roth space tilts toward investing; non-deductible interest tilts toward payoff.
- Risk tolerance: the loan payoff is certain, while the market return is only likely.
Because a rule of thumb is a rough average and not a promise, treat it as a starting point rather than a verdict. When two paths are this evenly matched, picking the one that lets you sleep is not a compromise; it is a sensible way to settle a genuine tie.
Common questions
Should I pay off a 6% loan or invest?
At 6%, investing usually wins on average because a diversified ~7% expected return exceeds the 6% guaranteed by paying off the loan — but the payoff is risk-free, so it's a close, defensible call either way.
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 6% loan is economically identical to earning a guaranteed, tax-free 6% on that money. That's why high-rate debt is one of the best "investments" available.