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Prepay vs Invest Calculator

Prepay the loan or invest the surplus?

You have extra money. Two options: send it to the bank (prepay) or invest it (mutual funds, FD, equity). After tax, which one earns you more? This calculator does the math.

01Your numbers
Loan interest rate %
6%10%14%20%
Expected investment return (pre-tax) %
4%8%12%20%
Equity MF: ~12% long-term · PPF: 7.1% · FD: 6-7% · ELSS: ~12-14%
Your tax slab %
0%5%20%30%
Is this a home loan?
Home loan interest gets Section 24(b) deduction. This lowers the "effective" loan rate.
Investment type
02The verdict
live
Better choice
—
Annualized advantage
—
enter values to see
Effective loan cost (after tax) 0%
Effective investment return (after tax) 0%
Risk-adjusted recommendation —

How this calculator thinks about the decision

The question "prepay or invest?" is fundamentally about comparing two interest rates:

  • The effective cost of your loan after tax benefits (for a home loan, much lower than the nominal rate; for a car or personal loan, the nominal rate itself).
  • The effective return on your investment after taxes on gains (for equity LTCG: 10%; for debt: your slab rate; for PPF: zero).

If the effective investment return is higher, investing mathematically wins. If the effective loan cost is higher, prepaying wins.

For home loan borrowers in 30% slab

Home loan at 8.5% with Section 24(b): you save ~2.5-3% in taxes on the interest paid → effective rate around 6-6.5%. Equity MF at 12% gross → after 10% LTCG → ~10.4%. Investing wins by ~4% per year.

For car or personal loan borrowers in 30% slab

Personal loan at 14%: no tax benefit → effective rate 14%. Equity MF at 12% pre-tax → ~10.4% after LTCG. Prepaying wins by ~3.6% per year.

The math is only half the story

Even when investing wins mathematically, prepayment has non-financial benefits:

  • Psychological peace — being debt-free is its own reward, especially in volatile markets
  • Guaranteed return — prepaying gives a certain saving; investments may underperform expectations
  • Cash flow improvement — lower EMI frees monthly income for other goals
  • Reduced financial vulnerability — less debt means more resilience to income disruptions (job loss, illness)

Many financial planners suggest a hybrid approach: prepay enough to cut your loan tenure to a comfortable level (15 years instead of 25, say), then invest the rest. This balances mathematical advantage with psychological comfort.

When investing definitely doesn't make sense

  • If you have credit card debt at 36-42% (always pay this off first)
  • If you have personal loan debt above 15% (usually pay this off before investing)
  • If you don't have an emergency fund of 6 months' expenses (build that first)
  • If you're close to retirement and prioritizing safety