What does this tool answer?
Financing offers advertise a flat rate (such as 4% a year), but it is charged on the full amount for the whole term even though you repay it gradually, so the real cost is higher. The tool calculates the installment and the effective annual rate (APR), then compares buying for cash, financing and leasing by the present cost of each option at your money's opportunity return.
The formulas
- Monthly installment = financed amount × (1 + flat rate × term in years) ÷ number of months.
- Effective annual rate: the monthly rate at which the present value of the installments equals the financed amount after fees, multiplied by 12, like the RATE function in Excel.
- Monthly opportunity return = (1 + annual opportunity return)^(1 ÷ 12) − 1.
- Present cost of financing = down payment + fees + present value of the installments at the opportunity return.
- Present cost of leasing = present value of the lease payments + present value of the purchase price at the end.
Worked example
A piece of equipment costs 100,000 SAR in cash. A financing offer has a 20,000 SAR down payment and a 4% flat rate for 60 months, a lease offer is 1,800 SAR a month for 60 months followed by a purchase for 5,000 SAR, and the opportunity return is 8%:
- Installment = 80,000 × (1 + 4% × 5) ÷ 60 = 1,600 SAR, and the total you pay with financing is 116,000 SAR.
- Effective annual rate = 7.42%, not 4%.
- Present cost: cash 100,000 SAR, financing 99,431.85 SAR, and leasing 92,763.74 SAR (the total you pay with leasing is 113,000 SAR).
- With these numbers, leasing is the cheapest, because your money earns 8% while it stays in your business.
Why the opportunity return?
The money you pay in cash today could have been working in your business. The opportunity return is what this money would earn if it stayed with you. The higher it is, the more worthwhile it is to defer payment (through financing or leasing); the lower it is, the more worthwhile it is to buy for cash.
Limits of the tool
The comparison is financial only: the decision also depends on your liquidity, the contract terms, guarantees, maintenance and the value of the asset at the end of the term, and the calculation does not include VAT. This is an estimate based on the numbers you entered, not financial or investment advice.
Frequently asked questions
Why is the effective rate higher than the advertised rate?
Does it match the bank's calculation?
What opportunity return should I enter?
Content last reviewed: 2026-10-28