“Paying in cash is best. Getting into debt is never a good idea.”
This is a statement we hear often. In many cases it makes sense: avoiding debt can help maintain healthier personal finances.
If we go into debt:
- We add more cost to the product or service, due to the total interest paid.
- Worst of all, if we consume on credit beyond our means, it can lead to personal financial ruin.
But is that always the best decision?
At inbestMe, where we promote effective financial planning, we believe it is worthwhile to question any belief and offer a more complete view.
Especially when discussing a significant purchase such as a car.
Let’s consider a broader perspective: what if instead of paying in cash, you could invest that money with an expected return above the loan cost?
Comparing decisions: paying in cash or investing
We’ll use the case of buying my electric car. After applying the €15,000 trade‑in from the previous vehicle, a remaining balance of €37,760 remained (see full table in Annex I).
The scenario here is more sophisticated or aggressive: I have the capital available (but invested) and could pay it all at once. But I also have the option to finance the car—via leasing, renting, or a loan—and pay the remainder in monthly installments.
The dilemma:
- Should I divest and use that capital now to pay for the car?
- Or should I keep my money invested and pay the car over time?
This pits the financial cost of the loan against the expected return on investment.
As a general rule for this strategy: if your investment returns exceed the interest paid on the financing, financing the purchase can be a financially efficient move.
A real‑world example
Here are the key figures:
- Car price remaining after trade‑in: €37,760
- Leasing financing: €487 monthly over 48 months + final balloon payment of €17,780
- Total financing cost: €3,381 (APR 2.99% / Effective annual cost 3%)
Now imagine keeping the €37,760 invested for the financing period in an inbestMe index‑fund portfolio profile 10, with an expected annual return of 7%. You accumulate €7,784, which nets €6,384 after taxes (see Annex I; for simplicity we assume the investment is closed and taxes paid).
Compared to the loan cost (€3,381), the net gain is clear: €6,384 – €3,381 = €3,003. In this case, financing is advantageous strictly from an opportunity‑cost perspective, because investment returns exceed the leasing cost.
In the table below we present different scenarios and the financially most reasonable decision:
Expected return vs. financial cost
| Expected annual return | Effective financing cost | Finance? | Deficit(-)/Surplus | Comments |
| 3% | 3% | No | -644 € | inbestMe profile 2 (negative due to taxes) |
| 5% | 3% | Yes | +1.180 € | inbestMe profile 6 |
| 7% | 3% | Clearly yes | +3.003 € | inbestMe profile 10 |
| 3% | 5% | No | -1.200 € | inbestMe profile 2 |
| 0% | 3% | No | -3.381 € | Not investing |
The table above shows different examples. You can see the calculations in detail in Appendix I.
The trend is clear: the more the expected annual return on our investments exceeds the interest rate on the loan, the more advantageous it will be for us from a strictly financial point of view.
In the appendix, you can see the complete table with all the figures illustrating various cases.
However, if we are unable to obtain low financing interest rates (say, below 5%), even if we obtain good returns on our investment, the strictly financial comparison will be negative or even.
The risk: loan interest is certain, investment return is not—and taxable
This analysis can oversimplify if key points are ignored:
- Expected return is just that—expected. Loan interest is fixed and contractual; investment returns can fluctuate with market volatility. inbestMe’s returns are long‑term expectations—short‑term results may vary.
That said, for investment horizons of five years or more, the statistical odds of loss decrease.
This more sophisticated strategy only makes sense for those who are:
- People with a reasonable level of financial knowledge.
- Investors with well-diversified portfolios that are tailored to their risk profile.
- Individuals with a certain amount of financial and emotional leeway to deal with unforeseen events.
And of course, ideally:
- A difference between expected return/interest on the relevant loan.
- As the table above shows, it is not enough for the interest rate to be equal to the return on our investments: we have to pay tax on that return, while the interest we pay on a car loan has no tax benefit. The tax authorities do not refund anything on the interest on a consumer loan.
Later, we will look at other important aspects to consider.
Negotiating the interest rate: a key part of the process
Buying a car isn’t trivial. For most people, it is the second‑largest purchase after housing. Although Spaniards tend to keep cars for 12–13 years, the average person buys 4 to 5 cars over a lifetime. Despite this, many buy with far less financial rigor than they should.
One of the most overlooked—but decisive—factors is the interest rate on the loan, leasing, or renting agreement.
While we scrutinize the car price and extras to the cent, we often accept the financing rate offered by the dealer without question. That’s a mistake.
Interest rates on car loans/renting/leasing are negotiable.
Just like mortgages, you can negotiate car financing:
- You can compare offers from different companies.
- You can highlight your history as a good customer.
- You can take advantage of promotions from manufacturers or companies offering very low rates.
- Or you can wait until the right moment, extending the use of your current car a little longer.
Even in leasing or renting, the rate and agreed residual value directly affect total cost. Investing time to negotiate can save thousands of euros. If you take your car purchase seriously, take the financing just as seriously. Getting 3% financing isn’t easy—but it is possible.
How? By:
- If you have a good negotiating position as a customer with the bank or financial institution.
- If you are on the lookout for special financing offers from brands.
- If you compare different financial services.
- Make financing part of the purchase decision. This takes time. You may even decide to make the brand/vehicle a secondary decision. Or have several very similar options where financing becomes the final deciding factor.
In my case, combining conditions 1) and 2) allowed me to secure a 3% rate I consider exceptional.
Bear in mind: some brands offer big discounts if you use their financing arm—but that often comes with TAE rates of 8% or more. It’s rare to get both steep discounts and low financing costs—but it’s worth trying.
Undercapitalization and the optionality of leasing
Earlier we looked purely at financial metrics. Going into debt costs you—but so does draining your capital to buy outright. While it may seem financially questionable to pay interest if it exceeds your investment return, many prefer not to liquidate available capital.
Another factor: lenders often view investors who borrow while keeping assets as more creditworthy—if their debt capacity is sound.
Leasing and renting with residual value provide flexibility. With leasing, you often agree on a buy‑back price at contract end; renting usually doesn’t include that, though some contracts allow it.
These arrangements (especially renting) let you use the car for a fixed period and then choose to return it or keep it by paying a final fee (residual value). That optionality featured in my real‑world example (see Annex I).
When I shared a LinkedIn analysis of my electric car financing, some were skeptical about battery life, autonomy, obsolescence… But these walk away concerns impact combustion vehicles even more—whose sales will be banned in the EU from 2035.
We live in a world of constant transformation: electric vehicles, autonomy, rapid tech advances… In such an environment, the optionality of leasing is especially valuable regardless of vehicle type. It’s not just about finance—it’s a strategic edge: flexibility in a changing world has value.
Conclusion: to finance or to pay in cash?
Paying in cash is generally the most prudent option. But it’s not always the most efficient—financially or strategically. If you can access low-cost financing and have the ability (and profile) to invest your capital successfully, financing may be a rational, intelligent choice.
The key is comparing the actual cost of the loan with expected investment return—and remembering that financial analysis only makes sense when combined with self-knowledge and planning. The capital drain of a cash purchase and the flexibility that options like leasing provide are also relevant.
We summarized the main considerations for choosing between car financing options in the table above.
In my case (not universally applicable), I chose leasing at 3%, leveraging both my investing experience and financial flexibility. In a tech‑evolving world, the option to keep—or not—the car after the contract, thanks to pre‑agreed residual value, was a decisive factor. Beyond purely financial factors, I ultimately went electric for the additional fuel cost savings. A simple calculation showed that half of the leasing cost was offset by fuel savings—making my scenario even more attractive.
I hope these reflections are helpful. In the end, everyone must evaluate their own finances, preferences, and circumstances before deciding.
Because the best decisions don’t just optimize the present—they open doors to the future.
Annex I: full financial worksheets
My case: expected investment return 7% annually. Financing cost 3%
If I keep the car (pay residual), total paid: €56,141, financing cost: €3,381. Investment return before taxes: €7,844; net after tax: €6,384. Net surplus: €3,003 (€6,384 – €3,381).
Expected investment return 5% annually. Financing cost 3%
Total car cost: €56,141, financing €3,381. Estimated investment return before tax: €5,612; net €4,561. Net surplus €1,180 (€4,561 – €3,381). Here the margin is tighter and factors like undercapitalization and optionality matter.
Important note: in both scenarios, for simplicity we assumed investment liquidation at contract end and immediate tax payment. That may not be necessary. Investors may stay invested, benefit further from compounding, and defer taxes—making financing even more favorable.
