Short answer: probably not.
There are a lot of things to consider in making your decision, but there are a few especially important things to consider before making this decision.
Am I already reaching my other financial goals?
You should have a very solid idea at this point in the planning stage of what your monthly expenditures are (if you don’t, that will be your first step). If you add in this expense, will it strain any of your other goals or normal expenses? Keeping in mind, cars cost more than just a monthly payment when you factor in maintenance.
If you aren’t investing 10-15% of your income in retirement plans like a 401k or Roth IRA, chances are giving yourself a monthly payment will only make your other goals harder to achieve.
How old is it?
Cars lose about 60% of their value within 5 years, so buying a new car is a guaranteed financial loss pretty much as soon as you drive it off the lot. Granted, cars, in general, are depreciating assets, but you can at least minimize your loss by purchasing one 5+ years old. Because of this steep drop-off in value in the first 5 years of a car’s life, it’s very easy to get “upside-down” in a car loan. This means you owe more on your car than what it’s worth, and you’ll want to purchase Gap Insurance coverage on top of what you already carry for auto coverage.
What interest rate are you getting on it?
The only time that this can mathematically make sense is if you would otherwise be spending the extra cash by investing in low-cost index funds. For instance, paying on a car loan at ~5%, you would actually be financially benefiting more if you financed it at that rate and put all of your other dollars into investments (that yield ~8%) in the meantime. But if we’re honest with ourselves, how often is this the case?
The average car payment on a new car is about $550, and for used cars, it is about $400. If instead, you set aside this dollar amount monthly into a separate savings account, you could pay for a modest used car in cash and avoid the bank and its interest fees altogether.
Here are the pros of buying a car with cash:
Discounts. Paying for a car with cash often brings leverage during negotiations.
No car payment. Paying cash upfront means no monthly car payment expense. That’s a big deal if suddenly you lose your job or another expense comes up that needs addressing.
Spending less money. When you buy a car with cash, there’s no monthly payment or interest. It’s paid for upfront. That means you spend less money, including on interest payments and any potential loan fees.
Buying within your means. When you purchase with cash, you live within your means and you’re making smart budgeting decisions.
Power. When you pay with cash, you get the upper hand in the deal. It also means you can easily walk away if you do not feel satisfied.
If you do decide to get a car payment anyways, remember that you can pay it off early. But when you make those payments, make sure they’re applied to the principle and not future payments that factor in more interest.