Earn 8%, Pay 13%: Can You Borrow at a Higher Rate Than You Earn and Still Come Out Ahead?

You have money saved, earning a modest rate. You need money for a purchase. A lender offers you a loan at a higher rate than your savings earn. Common sense says: spend the savings, do not pay more than you earn.

Then someone shows you a table. On one side, the interest your savings would earn if you left them alone. On the other, the interest you would pay on a loan at a higher rate. The first number is bigger. "You earned 8% and paid 13%," they say, "and you still came out ahead. Stop thinking in rates. Think in volumes of interest."

It is a striking idea, and it is half right. The other half can cost a family thousands of dollars.

Why does this matter? Because this argument is one of the most repeated ideas in presentations about financing purchases through a participating whole life policy, and one of the least examined. A family that believes it can always borrow above its earning rate and come out ahead will borrow more, repay less, and wonder years later where the money went. A family that understands exactly when the idea holds, and when it does not, will make better decisions about every loan it ever takes, against a policy or anything else.

This page does what the usual tables do not. It redoes the arithmetic fairly, with the payments counted. It shows why borrowing at a higher rate than you earn always costs you on rates alone. And then it shows the real reasons a family can still come out ahead by borrowing, which have nothing to do with the volume of interest and everything to do with what withdrawing would cost.

It starts with one honest table.

What does the claim say, and why does it sound convincing?

The claim says that if you leave your savings untouched and borrow at a higher rate instead, the interest your savings earn can exceed the interest you pay, so you come out ahead despite the worse rate. It sounds convincing because the table it uses is arithmetically correct. What it leaves out is the money you pay each month to shrink the loan.

The usual presentation runs like this. You have a sum of money earning a fixed rate. You need the same sum. Option one: withdraw it and spend it. Option two: leave it where it is and borrow the same amount at a higher rate, repaid in monthly instalments over a few years. Then two figures are set side by side: the interest the savings earned over the period, and the interest paid on the loan over the same period. The interest earned is larger. Conclusion: borrowing won.

Both figures can be computed correctly. That is what makes the argument persuasive. The audience checks the arithmetic, finds it right, and accepts the conclusion.

The flaw is not in the arithmetic. It is in what the comparison holds constant, and what it quietly does not.

Where does the idea come from, and what is true in it?

It comes from a real observation: most households pay far more interest over a lifetime than they realize, and looking at the total dollars of interest leaving a family each year is more revealing than looking at any one rate. That part is true. The error is the leap from "volumes matter" to "rates do not."

Add up a typical household's interest for a year: the mortgage, the car loans, the credit card balances carried from month to month, the line of credit. The total is often a shock. Families who see that number for the first time understandably want to change where it goes. That instinct is sound, and it is the starting point of every serious conversation about financing purchases through capital the family owns.

R. Nelson Nash, who described the approach known as The Infinite Banking Concept®, asked readers to think about the whole flow of their money over a lifetime rather than one transaction at a time. That is a useful discipline. It reminds a family that paying cash is not free, because money spent stops earning, and that borrowing is not free, because interest is paid. Every purchase is financed one way or the other.

But a lifetime view does not repeal arithmetic. When you choose between two ways of paying for the same thing, the one that costs a higher rate on the money involved costs more, unless something else is gained. A presentation that uses the lifetime view to wave away the rate has taken a good idea one step too far.

What happens when you redo the arithmetic fairly?

When the monthly loan payments are counted, borrowing at a higher rate than you earn comes out behind. In this page's example, a family that borrows $50,000 at 8.7% rather than spending savings earning 6% ends five years about $4,704 behind a family that spends the savings and then saves the same monthly payment at the same 6%.

Here is a hypothetical example built for this page. The borrowing rate is 1.45 times the earning rate, a gap of the size these presentations usually use. Every figure is an assumption, not a quote.

This is the table that usually ends the discussion. Interest earned, $16,911. Interest paid, $11,839. The family that borrowed is $5,072 "ahead".

Now ask the question the table does not: where did the $1,030.65 a month come from? It came from the family's cash flow, every month, for five years. That money could have done something else. The fairest thing it could have done is exactly what the borrowing family's savings did: sit in the same account at the same 6%.

So compare two families with the same income, the same savings and the same need.

Same income. Same purchase. Same monthly outlay. Family B is behind.

The reason is not mysterious. While Family B owes money, it pays 8.7% on the balance while its own money earns 6%. That 2.7% gap is charged on every dollar owed, for as long as it is owed. The comparison of interest volumes hides the gap because the loan balance shrinks every month while the savings balance never does. The interest paid looks small because the loan is being paid down, with money the table never counts.

The principle is simple. On rates alone, borrowing at a higher rate than your money earns costs you the difference. No arrangement of the numbers changes that.

Why do the interest figures mislead?

Because they compare two balances that behave differently. The savings compound on the full amount for the whole period. The loan balance falls every month, so interest is charged on less and less. The payments that make the loan fall come from cash flow the comparison never counts.

Three things go wrong in the usual table.

1. The balances are not the same over time. The savings stay at $50,000 and grow. The loan starts at $50,000 and falls towards zero. Over five years, the average loan balance is roughly half the original amount, while the average savings balance is more than the original amount. Comparing interest on those two balances is like comparing the fuel used by a car that drives the whole trip with one that stops halfway.
2. The payments disappear. The family pays $61,839.18 over five years. The table shows only the $11,839.18 of interest inside those payments. The $50,000 of principal repaid is money the family had to find from its income. In the version where the family spends its savings, that same money is free to be saved.
3. The end point is not compared. A fair comparison asks one question: at the end of the same period, with the same income and the same spending, which family has more? The interest table never asks it.

There is a second, quieter error. The usual example often uses a fixed-rate savings product with a guaranteed rate and a loan with a fixed rate. Real life is rarely that tidy. Savings rates can fall. Loan rates can rise. The gap can widen.

How large is the cost at different rates?

The cost grows with the rates and with time. At a 1.45 ratio between the borrowing rate and the earning rate, over five years, the borrowing family ends between about $2,800 and $6,900 behind on $50,000, depending on the rates. Over longer repayment periods the gap is larger.

Here is the same comparison at several pairs of rates, all with the same $50,000, five-year monthly repayment and the payments saved at the earning rate in the other column. The last two rows show what happens when the loan costs 13% while the savings earn 8%, and when both rates are 13%.

In every row, the interest earned is larger than the interest paid. In every row, the family that borrowed is behind. That is the whole lesson in one table. Even when both rates are 13%, the family that borrowed ends slightly behind, because a 13% loan charged monthly costs about 13.8% over a year, while savings credited once a year earn 13%. Equal rates produce something close to a tie, and no better.

Time makes it worse. Stretch the same 6% and 8.7% example to a longer repayment period, and the gap grows.

A smaller monthly payment feels easier. It is also the longer exposure to the rate gap.

Does repaying faster change the answer?

It shrinks the cost but does not reverse it. In this page's example, the borrowing family ends about $813 behind if it repays in one year, about $1,648 in two, about $2,571 in three, and about $4,704 in five. The shorter the loan, the shorter the exposure to the rate gap.

The same $50,000, at the same 6% and 8.7%, repaid over different periods:

This table is useful for a practical reason. If a family decides that the reasons to keep its savings in place are worth the rate gap, the next decision is how fast to repay. Faster repayment keeps the price of that decision small. It is the same discipline Nash called not stealing the peas: repay what you borrow, on a schedule, as seriously as any lender would require.

What if your savings earn more than the loan costs?

Then the arithmetic reverses, and borrowing comes out ahead on rates. If the savings in this page's example earned 8.7% and the loan cost 6%, the borrowing family would end about $4,161 ahead after five years. That is ordinary leverage, and it carries its own risk: the higher earning rate must actually be earned.

This is the case the usual presentations rarely separate from the other. When the money you leave in place reliably earns more than the loan costs, keeping it there and borrowing is simply the better arithmetic. Businesses do this every day.

The word that matters is reliably. A fixed, guaranteed rate on savings and a fixed rate on the loan make the comparison safe. A savings rate that is not guaranteed, or a loan rate that can rise, makes it a bet. In a participating policy, the guaranteed values are contractual, but dividends are not guaranteed and the loan rate can change, so a spread that looks positive today is not a spread anyone can promise for five years.

What happens when the loan is not repaid at all?

The cost accelerates. If nothing is repaid and interest is added to the loan each year, $50,000 at 8.7% grows to about $75,878 in five years, while the same savings at 6% grow to about $66,911. The family is about $8,967 behind, and the gap widens every year.

Some presentations present the freedom not to repay as an advantage. Flexibility is real, and in a hard year it can matter. But as a plan, leaving interest to compound is the most expensive way to borrow against savings.

The arithmetic is the same as before, only harsher: the loan compounds at the higher rate on a balance that never falls. In a participating policy, this is also the path towards a loan that outgrows the cash value, which can end the contract. How that happens is set out on policy loans.

Then when can borrowing at a higher rate leave you ahead?

When withdrawing your savings would cost you something the rate comparison does not show. Tax triggered by the withdrawal, a surrender charge or penalty, room or rights you cannot rebuild, coverage, guarantees or insurability that would be lost, or savings that would realistically never be rebuilt. In those cases, the rate gap is the price of keeping something worth more.

This is where the idea becomes useful again, honestly stated. The volume of interest is not the reason to borrow. The reasons are these.

1. The withdrawal itself has a cost. Some savings cannot be taken out freely. A non-redeemable deposit can carry a penalty or simply not be redeemable. A registered retirement plan withdrawal is generally taxable income. A surrender of a life insurance policy above its adjusted cost basis creates taxable income under subsection 148(1) of the Income Tax Act. When the withdrawal costs money up front, Family A starts behind, and the comparison can tip.

2. The room cannot be rebuilt. Some places your money sits come with room that, once used or abandoned, does not come back. In many participating policies, deposit option room that is skipped does not carry forward, and the exemption test in the Income Tax Regulations limits how much a policy can accept later. Taking money out of such a contract and planning to put it back later may simply not be possible. How that room works is set out on maximizing the deposit option.

3. Something else is attached to the savings. A participating policy's cash value is attached to a death benefit, guaranteed values and, for some owners, insurability they could not buy again. Surrendering to raise cash ends all of that. Borrowing against it keeps it in force, at the price of the interest.

4. The tax treatment differs. Growth inside an exempt life insurance policy is not taxed each year under subsection 12.2(1) of the Income Tax Act, while interest earned in an ordinary account generally is, under paragraph 12(1)(c). In this page's example, if Family A's new savings were taxed at 40% each year, their effective growth would fall from 6% to 3.6%. Family B would still be behind, but only by about $633 instead of $4,704. The tax difference narrows the gap; in this example it does not close it.

5. Behaviour. This is the reason no table shows, and often the most important. A family that spends its savings and promises to save the payments may never save them. A family that keeps its savings and repays a loan on a schedule has a structure that forces the discipline. If Family A would realistically spend the $1,030.65 a month rather than save it, Family B ends ahead, not because of the rates, but because of what the family would actually do.

Notice what these five reasons have in common. None of them is about the rate. Each is about something that withdrawing destroys and borrowing preserves. That is the honest version of the idea: you can lose on the rate and still win on the whole, when what you keep is worth more than what the gap costs.

How do you weigh the five reasons against the rate gap?

Put a dollar figure on each. The rate gap is easy to compute. The others take more work: the tax or penalty on withdrawal, the value of room you would lose, the cost of replacing coverage, and an honest estimate of whether the payments would really be saved. Borrowing is justified only when those figures exceed the gap.

Here is a simple way to set it out.

If the first line is the largest, spend the savings. If the others together are larger, borrowing may be the better choice, and the higher rate is simply the price of keeping them.

What are the usual objections, and the honest answers?

Three come up often: that the borrowing family still owns its savings at the end, that its money kept compounding, and that it had control. Each is true. None changes the arithmetic, because the spending family also ends with savings, built from the payments it did not have to make.

"But Family B still has its $66,911 at the end." It does. Family A has $71,616 at the end, built from the payments it did not have to make to a lender. Both families end with savings; one has more.

"But Family B's money never stopped compounding." True, and Family A's new savings compounded too, from the first month. The difference is that Family B paid 8.7% on a balance while Family A paid nothing.

"But Family B had control and flexibility." That can be valuable, and it is one of the legitimate reasons on the list above. Control is worth something. The question is whether it is worth the gap, and the honest answer depends on the family.

How does this apply to a participating whole life policy?

The same arithmetic applies, with specific differences. The insurer sets the loan rate under the contract, and it can change. The cash value is not withdrawn, so its guaranteed values and any dividends continue, but dividends are not guaranteed. Growth in an exempt policy is not taxed each year. And a loan is a disposition for tax and reduces the net death benefit while it is owing.

When the savings are the cash value of a participating policy, the comparison has its own features.

The earning side is not a fixed rate. A participating policy's cash value grows through its guaranteed values and any dividends the insurer's board declares, which are not guaranteed and can go down. The "rate" the policy earns is not a number you can lock in for five years the way a fixed deposit's rate is.

The borrowing side is set by the insurer. The policy loan rate is set under the contract and can change. Unpaid interest is usually added to the loan. How a loan affects the dividends on your particular contract depends on the insurer's practice, which is why the loan rate and the dividend cannot simply be subtracted from each other, as explained on policy loan interest and dividends.

The tax side differs. Growth in an exempt policy is not included in income each year. A policy loan, however, is a disposition under subsection 148(9) of the Income Tax Act, and income arises if the loan proceeds exceed the policy's adjusted cost basis. Interest on a policy loan is deductible only when the borrowed money is used to earn income from a business or property, under subparagraph 20(1)(c)(i), and only to the extent the insurer verifies it in the prescribed form.

The protection side differs most. Withdrawing cash value means a partial surrender or a full one. A full surrender ends the coverage, the guarantees and any future dividends, and may be taxable. A loan keeps all of that in force, but whatever is owing at death comes off what the beneficiary receives.

So in a policy, reasons 2 and 3 above are often the real reasons to borrow rather than withdraw. The rate gap is still a cost. What the family weighs it against is coverage, guarantees and room that a surrender would end. What recapturing interest can and cannot mean in this setting is set out on what recapturing interest means.

What does an honest version of the idea sound like?

Something like this: "Borrowing at a higher rate than your money earns costs you the gap. Sometimes that cost is worth paying, because what you keep by not withdrawing is worth more. Let us put a number on both before you decide."

The idea that volumes of interest matter is not wrong. Families do pay far more interest over a lifetime than most of them realize, and looking at the total dollars that leave a household each year is a valuable exercise. Where the idea goes wrong is when it is used to suggest that the rate does not matter. It does.

Here is the difference between the two versions.

An explanation that sounds like the right-hand column respects the family's intelligence. It is also the only one that will still be true in ten years.

How should a family decide, step by step?

Write down the realistic repayment period, compute the cost of the rate gap over it, put a number on what withdrawing would cost or destroy, look honestly at whether the payments would be saved, and compare the two paths at the end of the same period.

1. Name the need. The purchase, its amount and its date.
2. Name the savings. Where the money sits, what it earns, and whether that rate is guaranteed.
3. Price the withdrawal. Tax, penalties, surrender charges, and anything that would end: coverage, guarantees, room.
4. Price the loan. The rate, whether it can change, and the realistic repayment schedule. Not the one you hope for; the one your budget can carry.
5. Run both paths to the same end date, with the same income and the same monthly outlay, as in the two-family table above.
6. Be honest about behaviour. If you would not save the payments, say so.
7. Decide, and write down the repayment plan if you borrow.

Who should help you run the numbers?

For a policy loan, a licensed insurance professional with years of hands-on experience servicing participating policies, who can obtain the loan rate, the adjusted cost basis and the effect of a loan on your contract; and an accountant who can confirm the tax on a withdrawal, a surrender or a loan.

The product without the understanding is just an insurance policy. The understanding without experience is just theory. A good professional will run both paths for you, with the payments counted, and will tell you when spending the savings is simply the better choice. In Quebec, the insurance professional is a Financial Security Advisor (conseiller en sécurité financière); in other provinces, a licensed life insurance agent.

I should be plain about my own position: I am paid by insurer commissions when a policy is bought. That is a conflict of interest, and it is one reason this page shows the arithmetic in full, including where borrowing loses.

How should you read the figures on this page?

Every amount, rate and term in the examples is a hypothetical assumption computed for this page: $50,000 at 6% and 8.7%, repaid monthly. They are not quotes, forecasts, or the rates of any lender or insurer. The tax rules are those of the Income Tax Act as consolidated to 30 September 2026.

The monthly payment uses the standard amortization formula; savings compound yearly at the stated rate, and saved payments compound monthly at the equivalent rate. Results are before tax unless stated. Dividends on participating policies are not guaranteed and are declared each year by the insurer's board. Policy loans carry interest at the insurer's rate and are a disposition for tax purposes. Amounts are in Canadian dollars.

What this page will not tell you

This page shows how to compare borrowing with withdrawing. It does not tell you whether to do either for your own purchase, what your savings will earn, or what any lender or insurer will charge. It does not price the tax on your own withdrawal or the value of your own coverage. Those answers depend on your contracts, your income, your health and your tax position, and they come from your insurance professional and your accountant.

Who this does not suit

Borrowing against savings at a higher rate does not suit a family with no clear repayment plan, no stable income to make the payments, or no real cost to withdrawing. For that family, spending the savings is usually the better choice, and no table of interest volumes should persuade it otherwise.

It can suit a family whose savings carry something that a withdrawal would destroy: coverage it needs, guarantees it values, room it cannot rebuild, or a tax bill it would rather not trigger. For that family, the higher rate is not a hidden gain. It is a known price, paid on purpose.

The rate always counts. The question is what you are buying by paying it.