If you are in the market for a new car, your first step should be to carefully look at your budget. Before you even head to the car dealerships to start test driving cars, you should have a handle on how much you can afford to spend, regardless if you plan to pay cash or apply for auto loans. Once you know what you can afford, you can look at the pros and cons of paying for the car in cash or taking on an auto loan.
Paying cash for your new car, rather than relying on auto loans, can be a very smart move, particularly if you have saved funds for the purchase. Paying cash up front means you will have zero financing costs, zero monthly payments, zero credit risk, and no concerns about owing more than the car is worth as it depreciates. As a bonus, if you pay cash for a car, you will likely not get in over your head financially. The car will be yours. You will possess the title.
When you examine your budget before you purchase the car, take note of what you will have to give up to fork over that cash. Maybe you need to pay for new storm windows, so should buy a used car. Or perhaps it would be more advantageous to pay off your school loan in lieu of a new ride. Most people do not set aside "car money" in a jar on top of the fridge for years to save up. Instead, they have to cash out an investment or pull the money out of an account that may have a penalty. Another consideration is simply that car dealerships are giving out some amazingly low rates on auto loans right now, which might mean your cash would pay better dividends invested elsewhere. The bottom line, though, is that cash is cash. You will not take on debt to pay for that car and it will be yours the moment you drive it off the lot.
In examining the options offered by various auto loans, the most important thing to know is what you can afford. The easiest way to determine that is to calculate a budget based on your monthly spending. Start with your overall take home monthly salary. Next, add up all your necessary spending (loans, electric bills, phone bills, tuition, etc.) Subtract that total from your take home salary. Then subtract the total estimate of what you spend on discretionary expenses, such as dining, magazine subscriptions, gas, gym memberships and clothing. Make sure you also include the amount per month you presently or hope to set aside for savings and retirement. Whatever you have left is what your budget can handle for a car payment. Do not forget that you are responsible for additional expenses such as insurance, licensing, gas, maintenance, parking fees, registration and a down payment to kick the loan off. You can role play with a cheaper or more expensive car and see what you are comfortable with. Before you sign paperwork for any auto loans, make sure you consider everything in your budget carefully.
Know what you can afford, regardless if you plan to take on auto loans or pay with cash. Stay firm on that limit. Put it on a yellow sticky and put it in your wallet. That guy on the car lot will always try to sell you a fancier model than you planned on. You are responsible for making those payments, no matter how great the deal may seem at the time. Be true to yourself and do not spend beyond what makes you and your budget comfortable.

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