How to use the pay cash vs finance calculator
- Enter the purchase price and any down payment you would make either way.
- Enter the financing rate (APR) and the number of monthly payments. Use 0 for a 0% offer, and add any fee paid up front.
- Enter the yearly rate your cash could earn, such as the yield on a savings account.
- Read the monthly payment, the loan interest and which choice leaves you with more money at the end of the term.
Formula
Monthly payment = amount financed x r x (1 + r)^n / ((1 + r)^n - 1), with r = APR / 12 and n payments (amount financed / n when APR is 0)
Cash kept if you finance = price - down payment - up-front fee, growing at the cash rate
Financing ahead by = cash kept grown to the end - value of the payments at the end
Both are valued at the end of the term using the monthly growth factor equal to the yearly cash rate
If you finance you keep the money in an account that earns the cash rate and pay each installment from it. If you pay cash you spend the money now and have nothing left to earn interest.
A $1,200 purchase at 0% APR for 12 months
Financing a $1,200 purchase at 0% APR over 12 months means $100 payments and $0 of loan interest. If your cash could earn 4% a year, the $1,200 you keep grows to $1,248.00 by the end, while the twelve payments, valued at the end, come to $1,221.84. Financing leaves you ahead by $26.16.
With a 6% loan the picture can flip. For a $2,000 purchase with $200 down, a $25 fee, 24 payments and the same 4% on cash, the payment is $79.78, the loan charges $114.72 of interest, and paying cash is ahead by $68.73.
How the comparison works
The loan costs interest, and your cash can earn interest if you keep it. The tool puts both on the same end date. A loan with a rate above what your cash earns tends to favor paying cash, and a low or zero rate tends to favor financing, but the numbers decide, not the rule.
A zero percent offer still leaves the cash decision open, since the only money in play is the interest earned on the cash you keep. If you set the cash rate to 0 the result is exactly even at 0% APR.
Things the tool cannot see
Promotional offers sometimes charge deferred interest back to the start if the balance is not paid in full on time, and the tool does not model that. It also ignores late fees, credit effects, differences between the cash and financed price, and tax on the interest you earn.
To explore a loan in detail, use the loan calculator or the loan comparison calculator, and for a car offer with a rebate or low rate see the car rebate vs low APR calculator.
Assumptions and limits
- Payments are level, monthly and made at the end of each month.
- Cash earns the yearly rate you enter, compounded monthly at the equivalent rate, with no taxes and no risk.
- The same price applies whether you pay cash or finance, and any fee is paid at the start.
- Late payments, deferred interest and credit impacts are not modeled.
Frequently asked questions
Is it better to pay cash or finance at 0%?
With 0% APR the loan costs nothing, so the question is whether your cash could earn interest in the meantime. The tool shows how much that interest is worth over the term.
How does the tool treat the money I keep if I finance?
It assumes you leave the cash in an account at the rate you enter and make each payment from it, then values everything at the end of the term.
What if the financing has a fee?
Enter it as a financing fee paid up front. It reduces the cash you keep and raises the total you pay under financing.
Why can paying cash win even when I have savings earning interest?
If the loan rate is higher than what your savings earn, the interest on the loan outweighs the interest on the cash, so paying cash leaves you with more at the end.