Save or Pay Off Debt Calculator United Kingdom

If you have spare money from a bonus, an inheritance or a few careful months, you may be choosing between paying off debt and building savings. This calculator compares the two in pounds of interest: the interest you avoid by clearing the debt against the interest you would earn by saving the same amount over a period you choose.

Why the comparison comes down to interest rates

Money you owe grows at the debt’s rate, and money you save grows at the savings rate. Lenders charge more than savers earn, so the two rarely balance. A credit card at 18% APR costs far more each year than a savings account at 4.5% AER would earn on the same balance. Paying off the card removes an 18% cost, the same as earning a guaranteed, tax-free 18% return. The wider the gap between the two rates, the more clearly paying off the debt wins.

How this calculator works

Enter the spare money you have, the interest rate on your debt and the rate your savings account pays. The calculator compounds the lump sum at each rate over the period you choose. The debt side shows the interest you would have been charged, and so avoid by paying the balance down. The savings side shows the interest you would earn instead, and the difference is the advantage of clearing the debt. The rates are your own, so you can model your actual card, loan or account.

Reading the result

If the interest avoided is larger than the interest earned, as it almost always is with credit cards, overdrafts and personal loans, paying off the debt is the stronger move. If your debt is cheaper than your savings return, which can happen with an interest-free promotional balance or a very low fixed-rate loan, saving may come out ahead. The advantage of paying off debt figure shows how many pounds you gain over the period by choosing the debt route, which you can weigh against the comfort of holding cash.

A worked example

Suppose you have £5,000 spare, a credit card charging 18% APR and a savings account paying 4.5% AER, and you look one year ahead. Leaving the debt in place would cost £900 in interest, so paying it off avoids £900. Saving the £5,000 would earn £225. Clearing the debt leaves you £675 better off after twelve months, and over two years the gap widens, because the debt compounds faster than the savings.

Now take the same £5,000 against a 0% balance transfer card with a year still to run, while your savings pay 4.5% AER. Paying the card off early avoids no interest, whereas keeping the money in savings earns £225. The calculator shows a negative advantage for clearing the debt, so the cash is better left in savings until the promotion is about to end, as long as you clear the card before the standard rate starts.

Tax and access

Two things can tip a close comparison. Savings interest is taxable once it exceeds your Personal Savings Allowance, so a 4.5% account may be worth less than 4.5% to you, while the interest you avoid by clearing debt is effectively tax-free. Money used to clear a debt is gone, though, and you cannot easily get it back in an emergency, whereas savings stay available. So keep a small emergency buffer first, then put spare cash towards the most expensive debt, and build larger savings once the costly borrowing is cleared. The calculator compares interest only, so weigh these points alongside its figure.

Common mistakes to avoid

• Putting every last pound into debt and keeping nothing for emergencies, so the next unexpected bill goes straight back on the card you just cleared.
• Comparing rates that are not annual equivalents. APR and AER both cover a full year, so compare those rather than a monthly rate against an annual one.
• Ignoring how you feel. If holding debt or holding no cash would keep you awake, the mathematically best answer may not suit you.
• Starting with a cheap debt. The calculator compares one debt at a time, so run it for your highest-rate balance first.

Assumptions and limitations

This is a planning estimate. It assumes both rates stay fixed for the whole period and that interest compounds once a year, while real cards compound monthly and savings rates can change. It does not account for tax on savings interest, early repayment charges on some loans or the value of an emergency fund, which you should set aside before comparing the rest. It also assumes you would actually save the money rather than spend it. Use the figures as a guide, keep a small cash cushion and pay off the most expensive debt first.

About This Save or Pay Off Debt Calculator

Use this save or pay off debt calculator to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.