Is it better to finance a car or pay cash?

It comes down to one comparison: does your money earn more invested than the car loan costs in interest? If your loan rate is higher than your expected investment return — which is common, with car loans around 8% — paying cash usually wins. But with a low or 0% dealer finance rate, or a high investment return, financing can leave you better off because your cash keeps compounding.

Why is paying cash not always best?

Because paying cash has a hidden cost: the returns you give up by not investing that money. If you'd have earned 7% on the cash and the loan only costs you a net rate below that, financing leaves you ahead. The trap is that this only works if you actually invest the cash you keep — not spend it.

What about a novated lease?

For employees, a novated lease is a third option that can beat both loan and cash, because you pay for the car (and running costs) with pre-tax income — and electric vehicles under the luxury car tax threshold are FBT-exempt. It's not for everyone, but worth comparing — see our novated lease calculator.

Car Loan vs Cash Calculator

Should you finance a car or pay cash? This compares the true cost of both — accounting for what your cash could earn if you invested it instead of spending it on the car.

Last verified: 5 May 2026

Finance the car or pay cash?

It's really: does your cash earn more investedthan the loan costs in interest? Loan rate above your return → pay cash. Low/0% dealer rate or high return → financing can win. Source: ASIC MoneySmart.

Worked example. A $40,000 car at 8.5% over 5 years costs about $9,200 in interest. Investing the $40k at 7% would earn ~$16,000 over the same time — so unless your return beats the loan rate, paying cash usually comes out ahead.

General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.

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