Opportunity cost explained

Short answer #

Opportunity cost is the foregone benefit of the best realistic alternative. Paying cash for a car may save loan interest while financing keeps capital invested. Compare both over the same period, after cost and with their different risks.

Important variables #

• Guaranteed avoided loan interest
• Uncertain net alternative return
• Liquidity reserve
• Equal horizon and payment timing

Worked example #

Using €20,000 cash avoids 5% loan interest. An expected 6% investment return is comparable only after tax, fees and risk; the one-point gap is not a guaranteed margin.

Break-even: What changes the result? #

Higher guaranteed credit cost favours cash or repayment. A longer investment horizon may spread volatility but does not make an assumed return certain.

Common mistakes #

• Comparing gross and net returns
• Confusing liquidity with return
• Modelling only one capital path

Sources & assumptions

• European Commission — Consumer credit (2026-08-17)
• RATIOXA — Methodology and formulas (2026-08-17)