Should You Invest or Pay off Your Loan with your extra money?
Managing extra money smartly is a big decision. Should you invest or pay off your loan? Both options have strong benefits, and the answer depends on your current financial situation, risk tolerance, and goals.
This blog post helps you understand which is best for you. We’ll explore both sides with clear examples, loan vs investment calculators, and practical checklists.
💡 Quick Summary
| Scenario | Prepay Loan | Invest the Money |
|---|---|---|
| You want peace of mind | ✅ Yes | ❌ No |
| You’re aiming for long-term wealth | ❌ No | ✅ Yes |
| You have high-interest debt (12%+) | ✅ Yes | ❌ No |
| If you know about Compund Interest | ❌ No | ✅ Yes |
📘 What Does Loan Prepayment Mean?
Loan prepayment means repaying a part of your loan before the scheduled tenure ends. This helps reduce your principal amount, thus reducing your interest burden.
Most banks don’t charge prepayment penalties on personal loans and home loans anymore, especially if you are paying from your funds.
Example: You have a ₹10 lakh personal loan for 5 years at 13% interest. If you prepay ₹2 lakh in the 2nd year, your total interest paid reduces by ₹60,000+ and you close the loan 10-12 months earlier.
📈 What If You Invest the Extra Money Instead?
Let’s say you expect 12% annual return from mutual funds or stocks. If your loan interest is below 10%, then investing might give better returns than prepayment.
Example: You have ₹2 lakh extra. Your loan interest rate is 9%. You invest the ₹2 lakh in an equity mutual fund that gives 12% CAGR. In 5 years, your investment grows to ₹3.5 lakh+ while your loan costs you only ₹1 lakh in interest.
You end up ahead by ₹50,000+ compared to prepaying the loan.
✅ People Who Should Prefer Loan Prepayment
If you relate to these situations, prepaying your loan is a better decision:
- 🧾 Irregular Income (freelancers, seasonal workers, commission-based jobs)
- 😟 Fear or Anxiety about Loans — you sleep better without liabilities
- 🚨 No Emergency Fund — better to clear debt than be stuck later
- 🧮 Multiple Loans and Credit Card Bills — reduce the burden fast
- 🏦 High-Interest Loan (above 11%) — like a personal loan or credit card EMI
Loan prepayment gives peace of mind and helps in improving your credit score.
💹 People Who Can Choose to Invest Instead
You may consider investing the extra amount if you meet these criteria:
- 👨💼 Steady Income (Government job or stable private job)
- 💼 Already Created Emergency Fund (3–6 months’ expenses)
- 🧠 Believes in Himself/Herself — strong control over spending
- 📈 Knowledge of the Stock Market or Mutual Funds
- 🎯 Believes in the Power of Compounding and Percentage Game
- 🧘 Can Comfortably Manage EMI Till End of Tenure
Such people often earn more by investing instead of saving on loan interest.
🧮 Prepay vs Invest: Use This Simple Formula
Use this comparison:
If Loan Interest > Expected Investment Return → Prepay Loan
If Loan Interest < Expected Investment Return → Invest the Money
Also use this free calculator to simulate both options:
👉 Loan Prepayment vs Investment Calculator (Try Now)
⚖️ Emotional Angle: Peace vs Profit
| Feeling | Preferred Option |
|---|---|
| You hate debt and feel pressure | Prepay Loan |
| You are okay with long-term plans and market ups & downs | Invest |
Sometimes, the right choice is the one that gives mental peace, even if it’s not the most profitable.
🙋 My Experience: What I Did
In 2023, I took a loan of ₹15 lakhs. Like most people, I initially focused on just paying the regular EMIs. But as my income stabilized, I decided to take a more balanced and strategic approach.
By January 2025, I had not only paid regular EMIs but also made additional repayments towards the principal, which brought down my outstanding loan to ₹8.5 lakhs.
Then, from January to May 2025, I took a new step — I started investing. I put around ₹2.5 lakhs into quality stocks and continued paying EMIs as usual.
Here’s where it gets interesting:
- My loan balance is now down to ₹7.1 lakhs by the end of the year.
- My investments are growing and may reach ₹6 lakhs by the end of the year
This strategy is working beautifully for me. I’m reducing my loan burden faster while also building a parallel investment portfolio that could eventually match or even exceed the remaining loan amount.
Why did I choose this approach?
Because I have a stable job and consistent income — which allows me to take calculated risks and stay committed to both goals: debt reduction and wealth creation.
📌 Final Thoughts
Whether you prepay or invest, the most important thing is to take action with clarity. Don’t let extra money sit idle in savings account. Use it to either reduce debt burden or grow your wealth.
Both are correct — choose based on your financial mindset, stability, and future goals.
Want personalized help? Ask me in the comments or subscribe to the CashVanto newsletter for exclusive tips.
Frequently Asked Questions
Is it better to pay off debt or save money?
It depends on your loan interest rate and expected investment returns. If your loan interest is higher than what you’d earn from an investment, prepaying is better. If your investment gives higher interest than your loan interest then, investing is better option.
Is prepaying a loan good for CIBIL score?
Yes, it reduces your outstanding debt and helps improve your credit score over time. But, to increase CIBIL score you want to prepay the loan is not a good idea. Even with paying EMI on time will increase your CIBIL score. Instead you can choose to invest your extra money.
Can I prepay any type of loan?
Most personal, auto, and home loans allow prepayment without penalty, especially if paid from your own savings.
What happens if I invest instead of prepaying?
If your investment earns more than your loan interest, you gain extra profit. But it also comes with market risks.
I have irregular income. Should I prepay?
Yes, prepaying gives stability. With uncertain cash flow, reducing debt is safer than taking market risks.
Is it a good idea to sell stocks to pay off debt?
No. Selling stocks to pay off debt is not a good idea. If you have any surplus amount then only you can pay off debt. Investing creates discipline. Debt creates fear and prevents you from making more debt.
Investing vs paying off debt calculator?
Use Our Cashvanto Calculator to check whether to invest or pay off debt with your surplus amount.
