The Common Misconception About Interest Rates

Many people assume that deciding whether to finance a large purchase (like a car) or pay in cash is a simple math problem:

If the interest rate on a loan is higher than the rate you could earn in a savings or investment account, pay cash.
If the interest rate on a loan is lower than your expected return, finance the purchase and invest the difference.

Seems straightforward, right? In reality, the decision is much more nuanced because of how loan payments and investment returns actually work over time.

The Math Behind Financing vs. Paying Cash

When you finance a purchase, your loan interest accrues on a declining balance—as you make payments, the amount you owe shrinks, and the interest charged decreases over time.

Conversely, when you invest, your returns compound on a growing balance—assuming positive returns, your investment base grows, and future earnings are calculated on a larger amount.

This compounding difference means you don’t necessarily need to earn a return higher than your loan’s interest rate to come out ahead. Even if your investment return is slightly lower than the loan interest rate, the power of compounding could still make investing the better option over time.

The Role of Loan Term and Investment Horizon

Another factor to consider is the length of the loan vs. your investment time horizon.

Over a short period (e.g., one year), investment returns can be unpredictable, making it riskier to finance at a higher rate while investing the difference.
Over a longer period (e.g., 10+ years), the probability of earning a positive, compounding return increases.

If your loan is short-term (e.g., a 3-year car loan), the risk of market fluctuations may not justify financing unless you’re certain your cash will be working harder elsewhere. However, for longer-term loans (e.g., 30-year mortgage), the opportunity cost of paying cash upfront is much higher.

BigLaw Attorneys: How This Applies to You

BigLaw attorneys often have high earning potential but also significant financial demands, including student loans, high taxes, capital account contributions, and long-term wealth-building goals. Here’s how the financing vs. cash decision applies:

Buying a home: Mortgage terms certainly vary, but if we assume the “standard” 30-year, fixed rate mortgage, then this is a scenario in which you may not need to earn a higher interest rate on your investment versus your loan, given that you have 30 years for your investment’s returns to stabilize and compound on a (hopefully) increasing balance, while your mortgage loan interest rate compounds on a declining balance.
Purchasing a car: Depending on the length of the auto loan, which may go out as far as 7 years (but hopefully not), this shorter time period makes it more likely that you could experience negative returns on any investments you make with cash saved through financing.
Student loan repayment: Naturally, student loans are among the most difficult to analyze, in this context (and in most others). If your Standard repayment period is 10 years for your federal loans, the probability is right on the cusp of comfort that you may experience positive enough returns to outpace the interest expense of not paying down the loans more aggressively.

Of course, if you were to get on to an Extended or Graduated payment plan, this increases the term of the loan and increases the odds of doing well in your investments, but it can come with its own set of risks (e.g., higher total interest cost over the life of the loan).

Another solution may be to refinance into a private loan at a lower interest rate but beware of the terms of private loans that can be far more cumbersome than those of federal loans. One rather under-utilized strategy for your student loan repayment may instead be to make your loans part of your investment portfolio, as we previously discussed here.

The Bigger Picture: Liquidity and Financial Flexibility

One key consideration in financing vs. paying outright is how it affects your liquidity and overall financial plan. Tying up too much cash in an asset (like a house or car) can leave you exposed to unexpected expenses or investment opportunities.

For BigLaw attorneys, maintaining liquidity is crucial given the volatility of bonuses/distributions, tax liabilities, and career transitions. Financing a purchase can sometimes be the better move if it allows you to:

Keep a liquidity fund intact
Invest in potentially higher-return opportunities
Maintain flexibility for career and lifestyle changes

Final Verdict: It’s Not Just About Interest Rates

The decision to finance or buy outright is not as simple as comparing loan rates to expected returns. The structure of how debt amortizes and how investments grow over time makes a big difference. For BigLaw attorneys, strategic financing can help balance liquidity, investment growth, and financial security—but only when done within a well-structured plan.

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