Car Loan vs. Paying Cash
What does financing a depreciating asset actually cost you all-in, including what your cash could have earned if you hadn't spent it?
Vehicle & Loan
$
$
%
Assumptions
%
%
$
Total Financing Cost
$40,557
$593/mo for 60 months
Total Interest Paid
$5,557
direct cost of borrowing
Opportunity Cost of Paying Cash
$16,426
what $35,000 earns in 5 yrs at 8%
Net Advantage
$38,523 (financing wins)
financing is the cheaper choice
Your expected investment return (8%) exceeds the loan rate (6.9%), making financing potentially advantageous.
Financing vs. Paying Cash
Financing
Vehicle price
$35,000
Down payment
$5,000
Loan amount
$30,000
Total interest paid
$5,557
Opportunity gain (cash kept invested)
+$14,080
Net economic cost
-$3,523
Cash
Vehicle price
$35,000
Down payment
$35,000
Loan amount
$0
Total interest paid
$0
Opportunity cost (cash spent)
-$16,426
Net economic cost
$35,000
Year-by-Year: Loan Balance vs. Vehicle Value
| Year | Loan Balance | Vehicle Value | Equity in Vehicle | Cash Invested (if financed) |
|---|---|---|---|---|
| 1 | $24,796 | $29,750 | $4,954 | $32,400 |
| 2 | $19,221 | $25,287 | $6,066 | $34,992 |
| 3 | $13,250 | $21,494 | $8,245 | $37,791 |
| 4 | $6,853 | $18,270 | $11,418 | $40,815 |
| 5 | $0 | $15,530 | $15,530 | $44,080 |