Does this calculator account for investment risk or volatility?

No. It assumes a steady average return for the investing scenario. Real markets can be volatile and may deliver lower or higher returns than you assume, especially over shorter timeframes.

Should I always choose the mathematically better option?

Not necessarily. The tool compares dollars only. Many people value being debt‑free, liquidity, and peace of mind as much as or more than a slight numerical edge.

How does tax treatment affect this comparison?

Taxes on investment returns and possible deductions for loan interest (for eligible loans) can change the math. This calculator does not model taxes; consult a tax professional for a more precise comparison.

Can I use this for business borrowing decisions?

You can use it for a quick, high‑level comparison, but business borrowing decisions should also factor in cash flow, risk, depreciation, and tax considerations. Work with your accountant or advisor for detailed analysis.

What if my cash on hand is different from the purchase cost?

That’s fine. For example, you might have $50,000 in cash but only need to finance a $30,000 purchase. The calculator models investing your available cash while borrowing for the purchase cost you specify.

finance calculator

Payoff vs Borrow Comparison

Decide whether to pay cash for a purchase or borrow and invest your cash instead. See loan payments, interest paid, and potential investment growth.

Results

Monthly loan payment: $990
Total paid on loan: $59,404
Total interest paid: $9,404
Future value if cash is invested: $64,168
Invested cash vs cost+interest: $4,764
Better option: borrow_and_invest

How to use this calculator

Enter the amount of cash you have on hand that could be used to pay for the purchase (cash on hand).
Enter the purchase cost you would finance if you choose to borrow instead of paying cash.
Enter the loan rate (APR %) and loan term in years for the borrowing scenario.
Enter your expected annual investment return (%) for the invested cash if you decide to borrow and keep the cash invested.
Review the calculated monthly loan payment, total paid and interest paid on the loan, the future value of invested cash, and the calculator’s indication of which option comes out ahead on dollars alone.
Experiment with different loan rates, investment returns, and terms to see how sensitive the decision is to your assumptions.

Inputs explained

Cash on hand: The amount of cash you currently have available that could be used to pay for the purchase outright or invested instead if you choose to borrow.
Purchase cost (if financed): The price of the item or investment you are considering financing. This is the principal amount of the loan in the borrowing scenario.
Loan rate (APR %): The annual percentage rate for the loan you would take out if you choose to borrow. This rate determines the interest portion of your monthly payment.
Loan term (years): The length of the loan in years (for example, 3, 5, or 7 years for a car loan). We convert this to months to compute payments and total interest.
Investment annual return (%): Your assumed average annual return if you invest your cash instead of using it to pay for the purchase. Choose a realistic value based on your risk tolerance and investment mix.

How it works

We assume you either: (A) pay cash up front for the purchase, avoiding a loan entirely, or (B) take out a loan for the purchase while keeping your cash invested.

For the borrowing scenario, we use the standard fixed‑rate amortization formula to calculate the monthly loan payment based on purchase cost, loan rate, and loan term.

Total paid on the loan is simply the monthly payment multiplied by the number of payments; interest paid is total paid minus the original purchase cost (principal).

For the investing side, we assume you invest your available cash at the annual return you specify, compounding monthly over the same term as the loan.

We then compare the future value of the invested cash at the end of the term to the total cost of borrowing (purchase cost plus interest paid) to determine which option appears financially better on a pure dollars basis.

The calculator labels the better option based on which side leaves you with more net value after accounting for loan interest and investment growth, while ignoring risk, taxes, and behavioral factors.

Formula

Loan payment (Pmt) uses the standard amortization formula:\n\nMonthly rate r = Loan rate ÷ 12 ÷ 100\nNumber of payments n = Loan term (years) × 12\nPmt = Purchase cost × [ r × (1 + r)^n ] ÷ [ (1 + r)^n − 1 ]\nTotal paid = Pmt × n\nInterest paid = Total paid − Purchase cost\n\nInvestment future value assumes monthly compounding on cash on hand:\nMonthly invest rate i = Investment return ÷ 12 ÷ 100\nFuture value = Cash on hand × (1 + i)^n\n\nWe compare Future value to (Purchase cost + Interest paid) and label the option with higher net value as the “better option” on a pure dollars basis.

When to use it

Deciding whether to finance a car or pay cash and invest the money you would otherwise spend on the car up front.
Comparing borrowing vs investing cash for big purchases such as home upgrades, equipment, or business assets.
Evaluating whether taking a low-rate loan while investing cash at a higher expected return is likely to be worthwhile on a risk‑adjusted basis.
Illustrating to clients or family members how loan interest and investment growth interact over time in the pay‑cash vs borrow decision.

Tips & cautions

Use conservative investment return assumptions, especially if your timeframe is short; borrowing to invest introduces risk, and actual returns may be lower than historical averages.
Consider liquidity needs and peace of mind: even if borrowing and investing looks slightly better on paper, an emergency fund and lower debt load can still be valuable.
Remember that investing returns are uncertain, while loan interest costs are contractually fixed; treat the calculator’s output as a starting point for discussion, not a guarantee.
Run multiple scenarios with different investment returns and loan rates to see how robust (or fragile) the apparent advantage of borrowing vs paying cash really is.
Ignores taxes on investment gains, investment risk, and other opportunity costs beyond the inputs you provide.
Assumes a fixed-rate, fully amortizing loan with no prepayments, fees, or penalties.
Assumes you invest your cash consistently over the full term and do not sell early, panic in downturns, or change contributions.
Does not model inflation, changes in purchasing power, or the value of flexibility and reduced debt.

Worked examples

Low-rate auto loan vs paying cash

Cash on hand = $30,000; Purchase cost = $30,000; Loan rate = 3% APR; Term = 5 years; Investment return = 6%/year.
We calculate the monthly loan payment and total interest paid over 5 years for the $30,000 loan.
We compute the future value of investing the $30,000 at 6% compounded monthly for 5 years.
Interpretation: if the future investment value comfortably exceeds the interest cost and you’re comfortable with the risk, borrowing may look better on paper—otherwise paying cash might be preferable.

High-rate loan vs moderate investment return

Cash on hand = $10,000; Purchase cost = $10,000; Loan rate = 12% APR; Term = 3 years; Investment return = 5%/year.
The calculator shows relatively high total interest paid compared with moderate growth of invested cash.
Interpretation: in this scenario, paying cash to avoid a 12% loan is likely more attractive than borrowing and investing at 5%.

Testing sensitivity to investment return

Hold purchase cost, loan rate, term, and cash on hand constant.
Run the calculator with investment returns of 3%, 5%, and 8% to see how the better option changes.
Interpretation: this helps you understand how reliant the “borrow and invest” strategy is on hitting a particular return target.

Deep dive

Compare paying cash versus borrowing and investing your cash by looking at loan payments, total interest, and projected investment growth over the same term.

Enter your cash on hand, purchase cost, loan rate and term, and expected investment return to see which option may leave you better off financially.

Ideal for evaluating car purchases, major home projects, or other big expenses where you could either pay cash or finance and keep your cash invested.

FAQs

Does this calculator account for investment risk or volatility?: No. It assumes a steady average return for the investing scenario. Real markets can be volatile and may deliver lower or higher returns than you assume, especially over shorter timeframes.
Should I always choose the mathematically better option?: Not necessarily. The tool compares dollars only. Many people value being debt‑free, liquidity, and peace of mind as much as or more than a slight numerical edge.
How does tax treatment affect this comparison?: Taxes on investment returns and possible deductions for loan interest (for eligible loans) can change the math. This calculator does not model taxes; consult a tax professional for a more precise comparison.
Can I use this for business borrowing decisions?: You can use it for a quick, high‑level comparison, but business borrowing decisions should also factor in cash flow, risk, depreciation, and tax considerations. Work with your accountant or advisor for detailed analysis.
What if my cash on hand is different from the purchase cost?: That’s fine. For example, you might have $50,000 in cash but only need to finance a $30,000 purchase. The calculator models investing your available cash while borrowing for the purchase cost you specify.

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Prepayment vs Investment

Compare making an extra monthly loan payment to investing that same amount to see months saved, interest saved, and investment growth.

This payoff vs borrow comparison calculator is an educational tool that uses simplified assumptions about loan amortization and investment growth. It does not incorporate taxes, fees, risk, or your personal financial situation and is not financial, legal, or tax advice. Before making major borrowing or investing decisions, review actual loan terms and consult a qualified financial or tax professional.