Car Loan vs Cash Calculator
Car Loan vs Cash Calculator
Have the cash to buy a car outright? Compare paying cash with borrowing and keeping your money invested — on the same monthly outgoings and the same end date, with tax on the return included.
Car loan or cash
A car costing $10,00,000, a 9% loan over 60 months, and cash that would otherwise earn 7% a year, tax-free
Two paths to the same date
- P
- the amount you would borrow — the cash you would otherwise spend
- n
- the loan tenure in months; the EMI is the level payment at the loan rate ÷ 12
- j
- the monthly return after tax: [(1 + annual return)1/12 − 1] × (1 − tax rate)
- Break-even
- the two paths tie exactly when j equals the loan’s monthly rate, so borrowing wins only if your cash earns, after tax, more than the loan’s effective rate
Worked example
A car costing $10,00,000, a 9% loan over 60 months, and cash that would otherwise earn 7% a year, tax-free
EMI on 10,00,000 at 9% for 60 months = $20,758; total interest $2,45,501
Borrow: the $10,00,000 stays invested and grows to 10,00,000 × 1.075 = $14,02,552
Pay cash: the $20,758 a month you do not owe is invested instead, and grows to $14,77,909
Borrowing minus cash = 14,02,552 − 14,77,909 = −$75,357: paying cash leaves more
Borrowing would win only above 9.38% a year — the loan's rate compounded monthly
Borrowing minus paying cash: 10,00,000 at 9% over 60 months
| Return on your cash | No tax | 20% tax | 30% tax |
|---|---|---|---|
| 6% | −$1,04,185 | −$1,37,354 | −$1,52,948 |
| 8% | −$44,883 | −$94,149 | −$1,16,894 |
| 9.38% | −$23 | −$62,098 | −$90,415 |
| 10% | $21,225 | −$47,085 | −$78,083 |
| 12% | $94,589 | $4,013 | −$36,419 |
A fair comparison: same monthly outgoings, same end date
Paying cash for a car costs you what that cash would have earned. Borrowing costs you the loan’s interest. The usual shortcut compares the two — interest paid against the return on the whole price — but that is not like for like. The borrower pays an EMI every month out of income; the cash buyer does not, and can invest that same amount instead. This page lines the two paths up exactly: both spend the EMI from income every month until the loan’s last payment. The borrower keeps the full price invested and repays the loan; the cash buyer builds a new investment from the EMIs they no longer owe. At the end both own the same car outright, so the only difference is the money each has left.
In the example the loan costs $2,45,501 in interest, and the cash kept invested earns $4,02,552 — which looks like a win for borrowing. It is not, because the cash buyer’s invested EMIs grow to $14,77,909, $75,357 more than the borrower is left with. The arithmetic has a clean answer: the paths tie exactly when your cash earns, after tax, the loan’s rate compounded monthly — 9.38% a year on a 9% car loan. Earn more and borrowing wins; earn less and paying cash does. Tax on the return is taken as it is credited each month, the way deposit interest is taxed, so it raises the return needed before tax — to 13.64% at a 30% rate. That differs from the prepay or invest calculator, which taxes a lump-sum gain once when it is sold.
The calculator leaves out things only you can weigh. A return is an assumption, while loan interest is certain, so compare the figure you enter with what a safe deposit would actually pay you. Lenders often add a processing fee and sometimes require their own insurance, which make borrowing dearer than its rate. On the other side, spending all your cash can leave you without an emergency fund, and a loan keeps money you might need at short notice. Some buyers are offered a lower price or a dealer discount for one route or the other; enter the amount you would actually pay. If the interest is tax-deductible for you, for instance on a car used for business, enter the rate after that benefit. For the EMI alone, use the car loan EMI calculator; to keep a buffer, the emergency fund calculator.
The difference is also shown in today’s money, discounted at the inflation rate you enter. The chart shows the borrower’s investments net of the loan, the loan balance, and the cash buyer’s growing investment. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
Is it better to buy a car with cash or a loan?
Borrowing leaves more only if your cash earns, after tax, more than the loan’s effective rate — 9.38% on a 9% car loan. Otherwise paying cash does, and its saving is certain.
Why not just compare the loan interest with what my cash would earn?
Because the cash buyer does not pay EMIs and can invest them. On the example the interest is $2,45,501 and the kept cash earns $4,02,552, yet paying cash still leaves $75,357 more once the unpaid EMIs are invested.
How does tax change the answer?
Tax lowers what the kept cash earns, so the pre-tax return needed for borrowing to win goes up — from 9.38% to 13.64% at a 30% rate on a 9% loan.
Should I keep some cash even if paying cash wins?
Many people do. Spending all your savings on a car leaves nothing for emergencies; a smaller down payment with a short loan can be a middle path.
Related calculators
References
- Brealey RA, Myers SC, Allen F. Principles of Corporate Finance. McGraw-Hill. Present and future values, annuities; the level-payment loan formula.
- Bodie Z, Kane A, Marcus AJ. Investments. McGraw-Hill. Risk and return: why an expected return is not a certain one.
- Central-bank inflation targets used as default inflation by currency: Reserve Bank of India (4% CPI, flexible inflation targeting framework); U.S. Federal Reserve (2% PCE); European Central Bank (2%); Bank of England (2% CPI); Bank of Canada (2%); Reserve Bank of Australia (2–3%); Bangko Sentral ng Pilipinas (3% ± 1). Actual inflation often runs above target.