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Cash vs Financing Calculator

Enter the price, loan APR, term, and your expected investment return.

Result

How it is calculated

The tool prices two options for the same purchase. Financing: the whole price is borrowed at APR percent per year over term months, with monthly rate r = APR ÷ 100 ÷ 12 and payment P = price × r ÷ (1 − (1 + r)−term) (or price ÷ term when APR is 0). Interest is P × term − price. Paying cash: the opportunity cost is the growth of the full price at the investment return over the same time, price × ((1 + invest ÷ 100)term ÷ 12 − 1). If the loan interest is at or below this growth it recommends Finance; otherwise Pay cash. There is no down payment, fee, tax or inflation, and the invested growth is not reduced as instalments are paid. Price and term must be above zero, APR and return cannot be negative. Amounts show a dollar sign.

Worked example

A 30000 purchase, 6 percent APR, 60 months, and an expected 8 percent investment return. The monthly rate is 0.5 percent, so the payment is 30000 × 0.005 ÷ (1 − 1.005−60) = 579.98. Total paid is 579.98 × 60 = 34799.04, so the interest is $4,799.04. Opportunity cost of paying cash: 30000 × (1.085 − 1) = 30000 × 0.4693 = $14,079.84. The interest is lower than the growth, so the tool recommends Finance. With a 3 percent return the growth falls to $4,778.22, below the interest, and the answer turns to Pay cash.

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Common mistakes

  • Entering an investment return you are not sure to earn. The recommendation flips on this single guess; a 3 percent return in the example gives Pay cash, 8 percent gives Finance.
  • Comparing against a risky return as if it were guaranteed. Loan interest is certain, while the investment growth in the tool is only an assumption.
  • Entering the term in years. The field is in months, so 5 years must be typed as 60.
  • Ignoring fees, taxes and a down payment. None are in the tool, so a loan with origination fees costs more than shown.
  • Forgetting the money you invest is also being drawn on to pay instalments in real life. The tool keeps the whole price growing for the full term, which favours financing.

Sources

About this calculator

Paying cash for a big purchase avoids interest charges entirely, but it isn't automatically the cheaper option once you account for opportunity cost — the return that cash could have earned if it had been invested instead of spent. Financing, meanwhile, lets you keep your cash invested while paying interest on the loan, which can come out ahead if your expected investment return exceeds the loan's APR.

This calculator compares the total interest cost of financing a purchase against the growth the same cash could generate if invested at your expected return over the loan term, so you can see numerically which option leaves you better off. It's a decision framework used in personal finance for weighing major purchases — cars, appliances, home improvements — against tying up savings, and it mirrors the reasoning financial advisors apply when a client asks whether to pay cash or take on low-interest debt.

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Comments (1)

  • Editorial team

    For a 0% financing offer, set the APR to 0: the interest line is zero and the opportunity cost is the growth you keep by not paying cash up front. Compare that figure with any discount the seller gives for paying cash. If the cash discount is larger than the opportunity cost shown, cash looks better. What are you weighing, and what return did you assume?

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