Does how you pay for a car matter if you can always borrow money?
Image: Rama, CC BY-SA 2.0 fr, via Wikimedia Commons
the Modigliani-Miller theorem says
Does how you pay for a car matter if you can always borrow money?
Imagine you're buying a car and you can either pay upfront or borrow money. You're confused because you thought borrowing money would make you poorer.
In a perfect world, the cost of the car doesn't change whether you pay with cash or borrow money. The technical term is the Modigliani-Miller theorem.
Example
If you buy a car for 20,000, paying with cash or borrowing 20,000 doesn't change the car's price.
Remember this
The way you pay for something doesn't affect its value in a perfect market.
Text adapted from Wikipedia, licensed under CC BY-SA 4.0.
Related concepts
Quantity theory of money
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Risk premium
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Coase theorem
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Supply and demand
Market-clearing price where quantity supplied equals quantity demanded
Risk parity
Risk parity allocates based on risk contribution, not capital allocation
Efficient-market hypothesis
Prices reflect all available information
Educational content, not financial advice.
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