Pay off the loan early, or invest the money?

An extra dollar paid on a loan earns exactly the loan's interest rate, guaranteed. An invested dollar beats that only if its return, after tax, averages more than the loan rate, and nothing guarantees it will. On a $15,000 loan at 7.5%, paying $300 a month extra saves $1,184.76 in interest; investing the $300 instead comes out ahead only if it averages more than 7.5% a year after tax.

What paying extra actually does

Take a $15,000 loan at 7.5% with 48 months left. The scheduled payment is $362.68.

Adding $300 a month clears the loan in 25 months instead of 48 and cuts total interest from $2,408.84 to $1,224.08. Every extra dollar goes straight to principal, so it removes all the interest that principal would have charged later.

The break-even, computed both ways

Compare two people with the same $662.68 a month for four years. One pays the loan off early, then invests the full $662.68 each month once it is gone. The other pays as scheduled and invests $300 a month from day one. Here is where the investor ends up at month 48, relative to the early payer, at different average returns:

Returns are compounded monthly in this model. The break-even is the loan rate, 7.5%, to the cent. The early payer's result is the same in every row; only the investor's changes. That is the whole trade: a fixed outcome against a range of outcomes centered on whatever return you expect.

Check the guaranteed alternative first

The fair comparison for a guaranteed return is another guaranteed return. A Treasury note held to maturity pays a known yield, so it is the natural benchmark. On October 6, 2026, the Treasury daily par yield curve showed 4.79% for 2 years and 5.03% for 5 years. Typical borrowing costs are well above that:

Rates are from the Fed's G.19 consumer credit release of September 8, 2026 and Freddie Mac's Primary Mortgage Market Survey. The rule that follows: if your loan rate is above the Treasury yield for a similar term, prepaying beats every risk-free investment. Investing only wins by taking risk. If you locked a mortgage at 3%, the reverse holds: the 5-year Treasury's 5.03% still nets 3.92% after tax in the 22% bracket, which beats prepaying with no risk at all.

The tax hurdle

Interest you avoid paying is not income, so it is not taxed. Interest you earn usually is: the IRS says most interest you can withdraw without penalty is taxable in the year it becomes available, and Treasury interest is federally taxable though exempt from state and local income tax. If a return is taxed every year as ordinary income, this is the pre-tax return needed to match a 7.5% loan:

Stock gains on assets held more than a year are taxed at long-term capital gains rates, and returns inside a 401(k) or IRA are not taxed each year, so the hurdle there is lower. See the 2026 contribution limits.

When the loan's interest is deductible

A deduction lowers the loan's real rate. If all the interest is deductible, the after-tax rate is the rate times (1 minus your bracket): 7.5% at 22% becomes 5.85%. Three deductions matter in 2026:

• Student loan interest: up to $2,500 a year, phasing out between $85,000 and $100,000 of modified AGI for single filers and $175,000 to $205,000 for joint filers, per IRS Revenue Procedure 2025-32.
• New car loan interest: up to $10,000 a year for 2025 through 2028, only on loans originated after December 31, 2024 for a new personal vehicle with final assembly in the US. It phases out above $100,000 of modified AGI ($200,000 joint) and is available whether or not you itemize, per the IRS summary of the One, Big, Beautiful Bill.
• Mortgage interest: only helps if you itemize. The 2026 standard deduction is $16,100 single and $32,200 joint, so many borrowers get no benefit. See standard deduction vs itemizing.

Early extra payments are worth more

A lump sum removes the interest its principal would have charged for the rest of the term, so timing changes the payoff. One $3,000 extra payment on the same $15,000 loan:

The same $3,000 is worth almost six times as much in month 1 as in month 36. Run your own loan through the loan calculator.

What comes before either choice

1. The full employer match. A 50% match is a 50% return on the day you contribute. No loan payoff matches it.
2. A cash buffer. Paying a 7.5% loan early and then borrowing at 22% on a card when the car breaks is a net loss. See how big the fund should be.
3. Card balances. At the Fed's 22.15% average, they come before any investing beyond the match.

A cleared loan also removes a fixed payment, which lowers your debt-to-income ratio if you plan to borrow again.

Make sure the extra payment hits principal

• Tell the servicer. The CFPB advises making sure extra payments are applied to principal rather than interest. Student loan servicers may instead advance your due date, a "paid ahead" status the CFPB has warned about.
• Check for a prepayment penalty. For most closed-end home loans, 12 CFR 1026.43(g) allows a penalty only on fixed-rate qualified mortgages that are not higher-priced, capped at 2% of the amount prepaid in the first two years, 1% in the third, and none after that. The CFPB says penalties do not normally apply to small extra principal payments.
• Read the next statement. The principal balance should drop by the full extra amount.

Frequently asked questions

Sources

1. Consumer Credit, G.19 (release of September 8, 2026), Federal Reserve Board. Checked October 2026.
2. Daily Treasury Par Yield Curve Rates, October 2026, US Department of the Treasury. Checked October 2026.
3. Primary Mortgage Market Survey, Freddie Mac. Checked October 2026.
4. Topic no. 403, Interest received, Internal Revenue Service. Checked October 2026.
5. Revenue Procedure 2025-32, Internal Revenue Service. Checked October 2026.
6. One, Big, Beautiful Bill Act: tax deductions for working Americans and seniors, Internal Revenue Service. Checked October 2026.
7. 12 CFR 1026.43(g), Prepayment penalties, Legal Information Institute. Checked October 2026.
8. What is a prepayment penalty?, Consumer Financial Protection Bureau. Checked October 2026.
9. Can paying off loans lower your FICO Score?, myFICO. Checked October 2026.