This week’s question came to me from a client who was in the market for a new car and asked for some advice. After a very lengthy discussion about car financing and negotiating (I LOVE this topic so I had a lot to say, as always haha!), she asked a final question. If I have the cash on hand, do I need to consider financing or can I just pay for it in cash?

Before I dive into what we talked about, I fully acknowledge this is a very nice and privileged position to be in. Debt is not only a useful tool – but it is sometimes a very necessary one. If you do not have the cash needed to pay for a major purchase (such as a car) upfront, financing will be your only option. However, in this client’s situation, she had been working an extra job for a few years and had accumulated some added cash reserves as a result. Thus, “to finance or not to finance” became a perfectly valid question.

As is the case for many financial questions, it can help to consider and evaluate both quantitative and a qualitative factors.

From the quantitative side (ie: the numbers/math side of things), when considering if it’s worth it to use debt to finance a purchase (again, if you have a choice at all) – evaluate the cost to carry the debt versus the alternative uses (and returns) for the cash you would use to make the purchase if you don’t take out debt.

In this case, the available rate on the debt was very favorable (2.9%). If she took out the loan, she could have used the available cash to invest in a money market fund (which is paying around 3.5% today) or to invest in the market more broadly. Both options were highly likely to return in excess of the 2.9% cost of the debt. Based on this math, using financing in this instance would have made sense from a purely quantitative perspective as the return available on the cash outpaced the cost of the debt.

From the qualitative side of things, it’s important to consider certain elements of taking on debt beyond the “math”. These things may include your relationship with debt and money in general, your preference for having (or avoiding) monthly payments, your desire to just get things done with/off your list, and whatever else comes up as you evaluate the decision. Let’s look at a few of these.

Some people have an aversion to debt. Others are comfortable with it, view it as a useful tool, and use it in thoughtful moderation. Others are comfortable with it but abuse it to a dangerous level. Knowing how you feel about debt – and how responsible you are with it – is also a key thing to evaluate. It’s also important to think about how diligent you are with money and cash management in general. Deciding to take out debt and use cash elsewhere requires that you follow-thru with those alternative plans for the cash.

This particular client is great with debt (has only a mortgage outstanding) and has never abused financing. However, she admitted she was less skilled with cash management (due to a full professional life and busy schedule). She worried she would end up using the cash reserves for other non-necessary purchases if she didn’t use it to buy the car and/or fail to redirect it to her investment portfolio. She also had a desire to not have a recurring monthly payment as it would be one less thing to worry about and keep track of in the future.

Once you look at your quantitative and qualitative factors combined, it will likely become clearer which path you should take – and which side of the equation matters more to you. Again, I realize that you won’t always have a choice to finance or not. But if you do, hopefully this framework can help you evaluate which path makes the most sense in your situation.