Should I finance my car or pay cash?
Car loan vs cash calculator
Paying cash avoids interest, but the cash stops earning. Here is the total cost of each choice, and the return your money would need to earn for financing to come out ahead.
Figures and method reviewed · How we calculate
Financing only beats paying cash if your cash earns more than
7.23% a year
At 5% a year, paying cash comes out $2,328 ahead after 5 years. That is what a 7.0% loan really costs once monthly compounding is counted, so the deposit, term and period do not move it.
- Total cost, financing
- $61,583
- Total cost, paying cash
- $59,255
- Car value after 5 years
- $17,748
Your numbers
Total cost over 5 years
Everything each choice costs you, including what the cash would have earned had you not spent it on the car. Lower is better.
- Down payment $5,000
- Repayments $41,583
- Running costs $15,000
- Car price $40,000
- Running costs $15,000
- Opportunity cost $4,255
Where the money goes
| Item | Amount |
|---|---|
| Down payment | $5,000 |
| Loan repayments, 60 months$693 a month on a $35,000 loan. | $41,583 |
| of which interest | $6,583 |
| Maintenance and running costs | $15,000 |
| Total cost of financing | $61,583 |
| Item | Amount |
|---|---|
| Car price | $40,000 |
| Maintenance and running costs | $15,000 |
| Opportunity cost: growth the cash would have earnedFinancing keeps $35,000 invested at 5% a year, with each repayment taken out of it as it is paid. | $4,255 |
| Total cost of paying cash | $59,255 |
The car is worth an estimated $17,748 after 5 years whichever way you pay, so depreciation does not change which option is cheaper, and nor do running costs, which are the same on both sides. Tax, registration, insurance and dealer fees are not included.
How to read the result
The big number is the break-even investment return: what your cash would have to earn, every year, for financing and paying cash to cost exactly the same. If you can reliably earn more than that on the money you keep, financing comes out ahead. If not, paying cash does.
It works out to the loan's true yearly cost. Car loans quote an annual rate but charge interest monthly, so a 7% loan really costs 7.23% a year. That is also why the deposit, the term and the comparison period barely move it: whatever the shape of the loan, financing only wins if your money earns more than the lender charges for it.
The two totals under it are the full cost of each choice over the period you pick. They include the same maintenance and running costs on both sides, so the gap between them is the part that actually depends on how you pay.
A worked example
Take the calculator's starting scenario: a $40,000 car, $5,000 down if you finance, a 7% loan over 60 months, $3,000 a year to run, and a 5% return on any cash you keep, compared over 5 years.
- Financing borrows $35,000. The repayment is $693 a month, $41,583 in total, of which $6,583 is interest. Add the deposit and $15,000 of running costs and the total is $61,583.
- Paying cash costs $40,000 up front plus the same $15,000 to run, $55,000 in all. But the $35,000 you would have kept by financing is no longer invested. Kept invested, with each repayment taken out of it as it fell due, it would have earned $4,255. That is the opportunity cost, and it brings the true cost of paying cash to $59,255.
Paying cash comes out $2,328 ahead. The interest on the loan, $6,583, is more than the $4,255 the cash would have earned, because 5% is less than the 7.23% the loan really costs. Either way the car is worth about $17,748 after 5 years, so depreciation does not change the answer.
The same car at different investment returns
| Your cash earns | Result over 5 years |
|---|---|
| 2% a year | Cash ahead by $5,032 |
| 4% a year | Cash ahead by $3,282 |
| 5% a year | Cash ahead by $2,328 |
| 6% a year | Cash ahead by $1,319 |
| 8% a year | Finance ahead by $873 |
| 10% a year | Finance ahead by $3,308 |
The cross-over sits at 7.23%. Below it paying cash wins, above it financing does, and the further you are from it the bigger the gap.
How the loan rate moves the bar
| Loan rate | Interest over the loan | Break-even return | At 5% return |
|---|---|---|---|
| 0% | $0 | 0.00% | Finance ahead by $5,112 |
| 3% | $2,734 | 3.04% | Finance ahead by $2,022 |
| 5% | $4,630 | 5.12% | Cash ahead by $121 |
| 7% | $6,583 | 7.23% | Cash ahead by $2,328 |
| 9% | $8,593 | 9.38% | Cash ahead by $4,600 |
| 12% | $11,713 | 12.68% | Cash ahead by $8,127 |
A 0% dealer finance offer has a break-even of zero: any return at all on the cash you keep makes financing cheaper, provided there are no fees and the cash price is the same. At the other end, no ordinary investment reliably beats a double-digit car loan.
Does a longer term help?
| Term | Monthly repayment | Interest in 5 years | Still owed at the end | Result |
|---|---|---|---|---|
| 36 months | $1,081 | $3,905 | – | Cash ahead by $1,427 |
| 60 months | $693 | $6,583 | – | Cash ahead by $2,328 |
| 84 months | $528 | $8,493 | $11,798 | Cash ahead by $2,951 |
A longer term lowers the repayment but keeps you borrowing for longer, so it adds interest. When your cash earns less than the loan costs, every extra month of borrowing makes financing a little worse. A loan that runs past the comparison period is treated as paid off at the end, so a long term cannot look cheap just because less of it was repaid.
When financing can make sense
- A genuinely cheap loan. Promotional rates near zero, with no fees and no higher price for taking the finance, put the break-even below what a savings account pays.
- Keeping a cash buffer. Emptying your savings for a car can leave you exposed to an emergency. The calculator only counts returns, not the value of having money to hand, so this is a judgement it leaves to you.
- Cash that is already earning more. Money in an offset account or paying down a higher-rate debt can be worth more than the car loan costs. Compare that rate with the break-even.
When paying cash usually wins
- The loan rate is higher than what your cash earns after tax. Interest on savings is usually taxable, while interest on a loan for a car you use privately is usually not deductible, so the real return on cash is lower than the headline rate.
- The loan has establishment or monthly fees, or the dealer offers a lower price for cash. Neither is in the calculator, and both push the answer towards cash.
- Your cash would otherwise sit in an everyday account earning little or nothing.
What this calculator leaves out
Loan fees, balloon payments, insurance, registration, stamp duty and dealer charges are not included, and neither is tax on investment returns. Running costs are the same whichever way you pay, so they appear in both totals and cancel out. Leases and novated leases work differently, because of their tax treatment, and need their own comparison.
How it is calculated
- Repayments use standard amortisation at a fixed rate, paid monthly. If the loan runs past the comparison period, the balance still owed is paid off at the end.
- Financing keeps the cash not spent on the deposit invested. Each repayment is taken out of it in the month it is paid, and the rest grows at the return you enter, compounding to exactly that rate over each year.
- The opportunity cost of paying cash is the growth that invested balance earns. The net difference between the two options is the cash total, including that cost, minus the finance total.
- The car loses the stated percentage of its remaining value each year. Running costs stay the same every year.
Questions about this calculator
How does the car loan vs cash calculator work?
It compares two ways of buying the same car with the same money. Paying cash spends the full price on day one. Financing spends only the down payment and keeps the rest invested, then pays each loan repayment out of that invested cash as it falls due.
At the end of the period, the cost of financing is everything paid to the lender plus the down payment and running costs. The cost of paying cash is the price and running costs plus what the cash would have earned had it stayed invested. Whichever total is lower is the cheaper choice.
What does the break-even investment return mean?
It is the return your cash would need to earn for financing and paying cash to cost exactly the same. If you can reliably earn more than that, financing comes out ahead; if not, paying cash does.
It works out to the true annual cost of the loan, which is a little above the quoted rate because interest is charged monthly. A 7% car loan costs about 7.23% a year. That is why the deposit, term and comparison period do not move it: financing only wins if your money earns more than the lender charges for it.
Why is the break-even return higher than my loan rate?
Because loan rates are quoted as a yearly figure but charged monthly, and interest on interest adds up. Investment returns are usually quoted as what you actually earn over a year, so the fair comparison is against the loan’s effective annual cost rather than its headline rate.
What is the opportunity cost of paying cash?
It is the investment growth you give up by spending the money on the car. If you finance instead, the part of the price you did not pay up front stays invested, but it shrinks every month as repayments come out of it. The opportunity cost is the growth that shrinking balance earns, compounded at the return you enter.
Counting growth on the full amount for the whole period, as some calculators do, ignores that the repayments have to come from somewhere, and makes financing look cheaper than it is.
What if the loan runs longer than the comparison period?
Whatever is still owed at the end of the period is treated as paid off then, and added to the cost of financing. Leaving it out would make financing look cheaper the shorter the period you chose, simply because less of the loan had been repaid.
How is depreciation calculated, and does it matter?
Each year the car loses the stated percentage of the value it has left, so it loses the most in the first year and less after that, and never drops below zero. The result is shown as the estimated value at the end of the period.
It does not change which option is cheaper. You own the same car either way, so it is worth the same at the end whether you paid cash or financed it. The same is true of maintenance and running costs.
Does it include tax, insurance or fees?
No. There is no tax, registration, insurance, stamp duty, dealer or loan establishment fee, and no balloon payment. Fees on the loan would make financing more expensive than shown; tax on investment returns would lower the return your cash really earns.
Are the figures adjusted for inflation?
No. Every amount is nominal, and running costs stay at the same amount every year rather than rising. Both options are affected the same way, so the comparison between them still holds.
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Guides
- Is it better to pay cash for a car or finance it? It comes down to one comparison: what your cash would earn against what the loan really costs. Here is how to make it properly, and the two offers that can flip it.
- How much does a house need to appreciate to beat renting? Less than most people assume when rents are high, and far more when they are not. Here is the break-even growth across a range of rents and mortgage rates, and how to work out your own.
- Does a rental property beat a savings account? Only if it grows fast enough to cover the gap between its rent and its interest. Here is how fast that is, across yields and loan rates, before tax.
- Should you pay off your mortgage early or invest? Overpaying earns your mortgage rate for certain; investing has to beat it after tax and risk. Here is where the line falls, and what moves it.