The Moment
You have extra money and you are torn: pay down your 12% personal loan, or invest in the stock market?
This is one of the most asked questions in personal finance — and one of the most straightforward to answer. At 8%+, the debt almost always wins.
The Guaranteed Return Argument
Paying off a 12% debt gives you a 12% guaranteed return. No risk. No volatility. No market timing required. Every dollar you put toward the debt saves you exactly 12 cents per year, guaranteed.
The stock market has averaged roughly 10% annually over the last 90 years. But that is an average. In any given year, returns range from +30% to -30%. Over 10 years, you might get 10% — or you might get 5%. Over 1 year, you might lose 20%.
The comparison: - Debt payoff: 12% return, 100% probability - Investing: 10% expected return, with significant year-to-year variance
When the guaranteed option exceeds the expected (average) return of the uncertain option, the guaranteed option wins. Above 8%, the margin is clear enough that the answer is almost always: pay the debt.
The One Exception: 401(k) Match
If your employer offers a 401(k) match and you are not capturing it, the match beats debt payoff even at 22% APR.
A 100% match on 3% of salary is an immediate 100% return. Even a 50% match is an immediate 50% return. No debt rate exceeds this.
The correct order: 1. Capture your full 401(k) match 2. Pay off all debt above 8% 3. Build emergency fund 4. Invest beyond the match
The match is the only investment that beats guaranteed debt payoff returns.
Run Your Numbers
Enter your debt rate and balance to see the interest savings from paying it off.
Personal Loan Payoff Planner
What to explore next
- →I have debt below 5% — should I pay it off or invest?
- →How do I prioritize multiple debts at different rates?
- →Should I use a bonus to pay off debt or invest?
Frequently Asked Questions
What about the tax deduction on student loan interest?
The student loan interest deduction is capped at $2,500/year and phases out at higher incomes. Even with the deduction, a 7% student loan only effectively costs 5.5-6% after the tax benefit. The deduction narrows the gap but does not change the fundamental math for rates above 8%.
What if I have 5-7% debt? Is it a toss-up?
Yes, 5-7% is the gray zone. The expected return from investing slightly exceeds the debt rate, but with risk. Reasonable people can disagree here. The tiebreaker: if the debt causes you stress, pay it off. The behavioral benefit of being debt-free has real value that the math does not capture.