How this is calculated
Both routes buy the same car and both end the hold period owning it outright, so the car itself drops out of the comparison. What is left is the money: when it leaves your hands, and what it would have earned had it stayed. Every amount is carried forward to the end of the hold at your after-tax savings rate, which is the only fair way to compare $32,000 spent today against $539 a month for five years.
The after-tax monthly rate is your APY reduced by your marginal tax rate and divided by twelve. At a 4.6% APY taxed at 22% that is 3.588% a year, or 0.299% a month. Interest on a savings account is ordinary income; leaving tax out is the most common way this calculation is quietly rigged in favour of financing.
The insurance delta is the other half of the wedge. A lender holding the title requires comprehensive and collision cover, and usually gap cover, for the life of the loan. If you would carry full coverage anyway, that difference is small — gap alone runs about $10 to $20 a month. If you would otherwise run liability only, the difference is $60 to $100 a month, which over five years is thousands of dollars that belongs in the financing column and is almost never put there.
The breakeven APR is then found by solving for the loan rate at which the two columns are equal. It is meaningfully lower than your savings rate, because tax and the insurance delta both eat into what financing earns you.
Worked example — the figures the page loads with.
A $32,000 drive-out price, $4,000 down, 4.9% over 60 months. The loan is $28,000 and the payment is $527.11, so you hand over $31,627 in payments plus $720 of gap insurance — $36,347 in cash out of pocket against $32,000 for the cash buyer.
But timing matters. The cash buyer's $32,000 leaves today and forgoes five years of growth at 3.588% after tax: $6,278. The financing buyer forgoes growth only on the $4,000 down payment ($785) and on the payments as they are made ($3,025). Totals in five-years-from-now dollars: $38,278 for cash, $40,157 for financing. Cash is ahead by $1,879.
The breakeven rate is 2.63%. Below that, financing wins; at the 4.9% quoted, it does not. A subvented 0.9% manufacturer rate flips the answer the other way — financing then leaves you $1,381 ahead — which is exactly why those offers exist.
What this does not account for
- Whether you keep the money invested. Modelled as a certainty; in practice it is the single largest source of error, and it runs one way only.
- Investment risk. If your "savings rate" is an expected stock-market return, it is not comparable to a fixed loan rate. A guaranteed 4.9% cost against a hoped-for 8% return is not the trade the arithmetic makes it look.
- Dealer incentives you give up by paying cash. Some captive lenders discount the price only when you finance; a few require you to keep the loan a set number of months before you can pay it off.
- Prepayment and refinancing. The model runs the loan to term or to your sale date, whichever comes first.
- Sales tax treatment and trade-in credit, which differ by state. Most states tax only the difference after a trade-in; a few tax the full price. Put your real drive-out figure in the price field.
- Running costs — maintenance, tyres, fuel or charging, registration. They are the same either way, so they cancel here, but they are not zero.
- Resale values. The depreciation defaults are broad averages. A specific model's residual can be far better or far worse, and the negative-equity plate is only as good as those two percentages.
Common questions
Why is the breakeven rate lower than my savings rate?
Two reasons. Your savings interest is taxed and the loan interest is not deductible, so a 4.6% APY is really 3.6% at a 22% marginal rate. And financing forces insurance you might not otherwise buy. Both push the breakeven down, which is why "finance whenever the loan rate is below your savings rate" is wrong.
What about 0% financing?
At 0% the arithmetic almost always favours financing — that is the point of the offer. Check first whether taking it costs you a rebate, which is the second mode on this page, and whether the promotional rate requires a shorter term with a payment you can carry.
Does a bigger down payment help?
It lowers the interest you pay and shortens the time you spend underwater, but it also takes money out of your savings earlier. Try it with the zero-down button — the direction of the answer usually does not change, only its size.
Should I finance and invest in the market instead of savings?
That is a different question with a different risk profile. Borrowing at a certain rate to invest at an uncertain one is leverage. It can be reasonable; it is not the same trade as leaving cash in a high-yield savings account, and this page should not be used to justify it.
What if I am going to sell the car before the loan ends?
Set the hold period shorter than the term and the model settles the remaining balance at that point. Plate II shows whether the balance is above the car's value in the month you plan to sell — that difference comes out of your pocket at the sale.
Is gap insurance worth it?
Only during the months when the loan exceeds the car's value, which Plate II shows. With a healthy down payment that window is often zero, and the cover is then a cost with nothing behind it. With little or nothing down it can run for years.