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Pay Cash vs Use 0% Financing

Is interest-free financing really free?

About this calculator

A 0% financing offer lets you pay for a purchase in monthly installments without interest, while the money you would have spent stays in your savings account and keeps earning. That makes 0% financing slightly better than paying cash, as long as nothing else changes. Often something does: a seller may give a discount for paying cash, the offer may carry a fee, and many store-card promotions use deferred interest, which charges all the interest back to the purchase date if the balance is not paid in full in time. This calculator weighs those pieces and tells you which choice comes out ahead, in today's dollars.

How to use this calculator

Enter the Purchase Price and any Cash Discount the seller offers for paying in full now. Enter the 0% Promo Term in months and any Financing Fee charged at purchase. Enter the Savings Yield (APY) your cash earns, such as the rate on a high-yield savings account. Under Advanced assumptions you can enter a Tax Rate on Interest if you want the interest taxed, and say whether deferred interest applies and at what Standard APR. Every result updates as you type, and the inputs are saved in the page address so you can bookmark or share a scenario.

The method

Both choices start with the full price in savings. Paying cash spends the price less the discount today, so only the discount stays in savings. Financing keeps the whole price in savings and pays it out in equal monthly installments of the price divided by the term, paid at the end of each month. The savings yield is converted to a monthly rate that compounds to the APY, after tax if you enter a tax rate. The interest earned while financing is the sum of each month's interest on the money still in savings. To compare in today's dollars, that interest is discounted back to the purchase date at the same savings rate; the advantage of financing is that amount minus the discount given up and minus the fee. The deferred-interest risk is a worst case: the standard APR charged on the full price for the whole promotion, as can happen when the balance is not cleared and little was paid down.

Worked example using the default values

A $3,000 purchase on a 12-month 0% offer means payments of $250 a month. With the cash in savings at 3.5% APY, it earns $57 in interest over the year, worth $55 in today's dollars, so 0% financing comes out ahead by $55. If the seller offered a 3% discount for cash instead, paying cash would cost $2,910, and paying cash would come out ahead by $35. If the offer has deferred interest at 29.99% and the balance is not cleared by the end of month 12, the interest charged back could be as much as $900, far more than the $55 at stake.

Interpreting the results

The headline tells you which choice leaves you better off and by how much, assuming every payment is made on time. The gain from 0% financing is usually small: it is roughly the interest on half the price for the length of the promotion. Any cash discount larger than that, or any fee, tips the answer toward paying cash. The deferred-interest risk is shown separately because it is not an expected cost; it is what a single slip could cost. Weigh it against how confident you are that you will pay the balance in full on time.

Practical tips

Set up automatic payments of at least the price divided by the term, because the minimum payment the lender asks for is often lower and will not clear the balance in time. Check whether the offer is true 0% APR, where interest only starts on any balance left after the promotion, or deferred interest, often worded as "no interest if paid in full". Ask the seller whether there is a discount for paying cash; the financing cost is sometimes built into the price. A new credit account adds a hard inquiry to your credit report, and a large promotional balance raises your credit utilization until it is paid down.

Limitations

The calculator assumes equal monthly payments that exactly clear the balance by the end of the promotion and a savings yield that stays the same throughout. It does not model late fees, the effect of a new account on your credit score, or rewards you might earn by paying with a credit card. The deferred-interest figure is a worst-case estimate using simple interest on the full price; the amount actually charged is based on the card's daily balances and terms. Interest on savings is taxable income, so use the tax rate input if you want an after-tax answer.

Frequently Asked Questions

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