In short: Compare your loan rate with your expected investment return: if the rate is higher (typical for overdrafts and consumer loans), pay off debt first — that saves money for sure. Very cheap loans can run alongside investing.
When you have money left over, the choice often comes down to this: pay off debt faster, or invest? The answer almost always lies in comparing interest rates.
List your loan rates: note the effective annual rate of each debt — an overdraft is often around 11–14 %, consumer loans around 6–9 % (as of 2025, varying by lender).
Set a realistic return: over the long run roughly 5–7 % before tax is plausible, but it is uncertain and fluctuates — no guarantee, and losses are possible.
Compare and decide: if the loan rate is higher than your expected return, paying off debt comes first — the interest you save is your reliable “return”.
Keep the order: a small emergency cushion first, then clear expensive debt, then invest — more under paying off debt.
What matters
At its core this is a sober interest comparison: every euro that pays down an expensive loan saves you exactly that loan's rate — reliably, and with no tax owed on the saving. Investing may earn more over the long run, but the return is uncertain, it fluctuates and it is usually taxed, while loan interest is a sure cost. So when the loan rate is above your realistically expected return, paying off debt is almost always the better move. A sensible order is: a small emergency cushion first, then your most expensive debt, then investing. The exceptions are very low-rate loans, such as some mortgages or subsidised credit — here investing can win on the numbers, though that is not guaranteed. And beyond the math, feeling matters: being debt-free gives many people more calm than a few percentage points of possible return.
ExampleA €2,000 overdraft at 13 % costs around €260 in interest a year. Clear the overdraft and you save that €260 for certain. To beat it, an investment would have to reliably return more than 13 % — and since the gain is taxed, even more than that before tax. Over time that is hard to reach.
Start by getting a clear picture of your loans and their rates — see more under paying off debt.
In depth
Calculating the rate threshold honestly
At the next level, the simple “loan rate versus target return” comparison no longer holds — both sides must be measured after tax and risk. Paying down debt gives you the saved interest guaranteed and tax-free, whereas a stock return is uncertain and, in Germany, costs roughly 26.4 % capital-gains tax including the solidarity surcharge (as of 2026; exactly 26.375 % without church tax). Example: a loan at 4 % effective is like a guaranteed 4 % net “return”; to beat that with an ETF you need roughly 5.4 % expected gross return just to break even after tax. If you still have your annual saver’s allowance of 1,000 € (2,000 € for married couples) unused, that threshold shifts down a little. So the rule isn’t “rate below 5 % = invest” but “net cost of the loan versus net yield of the investment” — and when in doubt, the guaranteed side wins.
Ordering multiple debts
Once more than one loan is running, the order matters more than the basic question. The mathematically optimal method is the avalanche: pay the minimum everywhere and throw every extra euro at the most expensive loan — typically an overdraft at often 10–13 % or a credit card. Only once the expensive items are gone does the pay-down-or-invest question even arise for the cheap remainder. Watch out with mortgage overpayments: many contracts allow only a limited share of the remaining balance per year without an early-repayment penalty, and during the fixed-rate period an old loan at 1.5 % can almost never be sensibly repaid early. A common advanced mistake is eagerly paying down a 1.5 % mortgage while a 12 % overdraft quietly runs alongside. Always sort by interest rate, not by gut feeling or balance size.
Emergency fund before pure optimization
The biggest trap at this level is “winning” the math and then failing on liquidity. If you put every euro into debt or an ETF and keep no buffer, the next broken washing machine or car repair forces you back into expensive debt — instantly undoing the interest advantage. The sensible order is therefore: first expensive debt (overdraft, card), then an emergency fund of about three to six months of net spending, and only after that the finer pay-down-versus-invest call on the cheap loan. A widespread misconception is to see the emergency fund as “lazy” money; in fact it is the insurance that makes your whole strategy sustainable at all. If you’re self-employed, also plan reserves for tax back-payments and fluctuating income. Optimization only pays off once the ground beneath it holds.
Checklist
I know the effective annual rate of each loan.
A small emergency fund is in place.
I pay off the most expensive debt (overdraft, consumer loan) first.
Only then do I invest spare money.
Common myths
Myth: Investing always beats paying off debt.
Reality: Only if the return reliably exceeds the loan rate — with overdrafts and consumer loans that is practically never the case.
Myth: Debt does not matter as long as I invest.
Reality: Expensive interest keeps running for sure while the return stays uncertain — that eats your head start fast.
Frequently asked questions
What if I have no emergency fund yet?
Build a small reserve first (about one month of expenses) before paying down expensive debt — otherwise the next surprise forces you back into new debt.
Should I pay off a cheap mortgage early?
With very low rates, investing can come out ahead on paper — but that is not certain. It is also a matter of feeling: being debt-free brings many people peace of mind.
