Abstract

The conventional “buy on time or pay cash” analysis seen in some mainstream personal finance textbooks is to compare the total finance cost of the loan to the total after-tax interest earnings on savings: if the former is higher than the latter, then pay cash, otherwise buy on time. This research note points out the flaws of such conventional approaches and the better decision can be made by simply comparing the interest rate on the loan to the after tax interest rate on savings.

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