Originally Posted by m4a1mustang

It is really specific to your financial situation.

In general, it's always best to pay cash outright. You don't have to worry about the loan or paying any interest... it's yours.

I know a lot of people like to think that it's better to finance because you can earn a higher rate on your money elsewhere, but to do that you're going to have to risk that cash. Chances are the risk free rate is going to be less than your loan rate, so do you really want to risk losing the money that's supposed to pay the car off? It's just not worth it. You'll end up taking on unnecessary risk as you try to split hairs. (In plain English: to earn a higher rate of return than the rate you're paying on your loan, you will have to invest the cash that otherwise would have paid for the car in risky assets. NOT a good idea.)

If you must finance, it's important to make a large enough down payment such that your loan won't be underwater for the life of the loan. Research resale values for the vehicle and determine how much you need to put down to accomplish this.

It's also extremely important to look at the total cost of your loan, not just the monthly payments. Make sure you are paying the least amount of interest possible. Obviously the shorter the loan term the better. Far too many people look at monthly payments only and end up taking out 72 month loans and get raped on total interest cost.

If you don't have enough cash available for a down payment on the vehicle you're looking at, you need to take a step back and save up more or consider a less expensive vehicle. If you MUST have it, then buy GAP insurance to protect yourself in case the car is totaled or stolen and you owe more on it than it's worth.