It’s one of the most common money questions, and the honest answer is “it depends.” Here is a simple way to think it through. This is general information, not financial advice.

Step 1: Cover the basics first

Before either choice, most people are better off with a small emergency fund, and with any employer retirement match claimed. A match is an immediate return on money you would otherwise skip. High-interest debt, like credit cards, usually comes next, since its rate is hard for any investment to beat reliably.

Step 2: Compare the rate you pay with what you might earn

Paying extra on a loan gives you a guaranteed return equal to its interest rate. A 7 percent car loan paid down early “earns” 7 percent, with no risk. Investing may earn more over many years, but it isn’t guaranteed, and it can lose money in the short term. The higher your loan rate, the stronger the case for paying it down.

Step 3: Consider how you’ll feel

Being debt-free brings peace of mind that a spreadsheet doesn’t capture. On the other hand, a very low-rate loan, such as a mortgage locked in at a low rate, may not be worth rushing to pay off, especially if you would otherwise leave retirement savings untouched.

A quick rule of thumb

Many people use a rough guideline: if the loan rate is high, pay it down; if it is low, lean toward investing; in between, do some of both. Taxes, your age, and how soon you need the money all change the answer.

Try the numbers

Use the calculators to see what extra payments save on a mortgage, car loan, student loan, or credit card. Then compare that with what you could reasonably expect from investing. For your situation, consider talking to a qualified professional.

← All guides