1. How much to spend?
Before you even think about what car you want, figure out how much car you can afford. There's no magic calculator, but consider this: Financial planners say it's unwise to spend more than 30% of your gross monthly income on housing, which should be your biggest expense. Don't let your car payment get so high that it cramps your ability to pay your mortgage, credit card bills or other recurring expenses.
Now, do you plan to pay all cash? Or will you get a loan?
Paying cash can be wise, particularly if your credit isn't good, because you'll probably have to pay a high interest rate. Drivers with good credit can get low rates -- Capital One is offering 6.09% on a three-year used-car loan, for instance -- so it might make sense to finance and keep the rest of your money in investments or use it to pay down other debts.
Think about the down payment, and try to put down 20% to 33%. But don't empty that piggy bank completely -- it's important to keep some cash on hand for emergencies.
If you want to finance, head to your bank or credit union and get pre-qualified for a loan; whether you use that lender's offer or not, you'll get a sense of what interest rate ballpark you're in. That can give you a leg up in negotiations with other lenders.
Take out the shortest loan you can, since longer ones (some run seven years) end up costing more in interest. Keep in mind that used-car loan rates are higher than those for new cars.
Get your credit report free at annualcreditreport.com, and pay the fee to get your FICO score -- the number between 300 and 850 that lenders use to determine what interest rate they'll charge you. The higher your score, the lower your rate.
"Cars are the second-biggest purchase most people make," says Steve Schooff of Capital One Automobile Finance. "Do your financial research before you even look at a car."
2. What kind of car?
Armed with your budget, head to car-research websites. Edmunds.com and Kelley Blue Book's site give vehicle information and pricing. Also check automaker sites such as GM's or Toyota's, and subscription sites like Consumer Reports.
Say you're interested in a Honda. The Web can tell you what a 2005 Civic is worth, how many air bags it has, its reliability and its fuel efficiency.
"This is your chance to look at all the options, all the features, to get all the facts," says Jim Riesenbach, chief executive of Autobytel, which has vehicle info and used-car listings on its site.
