If you’ve decided to buy a car, here are some tips for where to start, deciding whether to buy new or used, how to evaluate whether a used car is a lemon, how to know if you've gotten a good price, and how to calculate your monthly payments. There's also some information about whether buying a hybrid will save you money and whether or not you should go for the hottest new car.

Getting started

1. Determine your needs. Are you looking for basic transportation or a fancy car? Do you need a pickup or station wagon for that second job or do you need a beater car to get around town? Do you want the car to last 10 years or is something to get you through your college years good enough? Do you have a place to park your car in a safe neighborhood or do you need to think about protecting against car theft?
2. Research your options. Spend some time researching your options. Some car models have a history of great performance. Others don't. A wealth of information is available online. Web sites such as Kelley Blue Book or Edmunds provide information on car costs, reviews, ratings, and tips and advice for buying new and used cars. Consumer Reports also evaluates the strengths and weaknesses of various cars based on independent ratings.
3. Pick some cars to test drive. Based on your needs and research, pick some car models that will work for you and visit a local dealer to test drive those models. Make your first visit a "test drive only" visit. Don't even think about buying on your first day shopping for a car. Your goal is only to get in the car, drive it, and see how it feels. Buying will come later.
4. Look for incentives and rebates. Dealers are always offering various incentives and rebates to lure customers in. A cash rebate amounts to an immediate reduction off the price of the car. For example, a $3,000 cash rebate lowers the price of a $22,000 car to $19,000. Incentives, such as no-interest or low-interest financing, are also commonly offered to car buyers. Some dealers offer special rebate deals and financing for college seniors and recent graduates. Check out www.carsforgrads.com, a Web site that offers free information on college rebate programs from major car manufacturers.
5. Get quotes. If you're buying from a dealer, shop around. Get quotes from at least three dealers for the car you want (make sure the quotes are for the same model, options, color, and features). If you're buying from a private party, make sure you check the True Market Value from Edmunds or Kelley Blue Book.
6. Make your best deal and enjoy. After all the work of assessing needs, researching, and negotiating, enjoy the car you buy for years to come!

Wanting a really nice car

It's all about money. Fast cars, the latest-model cars, equal one thing: more money. If you've decided to spend your money on a car and you can afford the flashiest car you've ever dreamed of, go for it. Just make sure you can afford it—and all the expenses associated with it, including storing it somewhere safe.

Deciding between new and used

You may relish the thought of driving a brand new car off the lot for the first time, but is it worth the money? That's a question you need to answer for yourself before you go car shopping. With a new car, you won't have to worry about what the prior owner did (or didn't do!) to the car or whether there are any hidden problems. As the sole owner of the car, you'll know its performance and maintenance history from the start. You'll know exactly what you're getting for the price.

Another advantage of new cars is that you can usually get a lower interest rate if you're financing the purchase. New cars depreciate fast, though. The minute you drive the car off the lot, it's worth less than before you bought it. Most cars depreciate in value by 40% in their first three years! So, if you buy a $20,000 car, expect it to be worth $12,000 in three years. New cars also typically have higher insurance rates and higher motor vehicle registration fees.

Buying a used car

Buying a used car will cost you less upfront than a new car, but the buyer must beware. A two- to four-year-old used vehicle can be purchased at a savings of 25-50% compared to buying the same car new. While that's a healthy savings, it's only as valuable as the car's repair needs. If you buy a lemon—a car that looks fine but turns out to be a clunker—you can quickly spend a lot of money in repairs.

Used cars can be bought through a manufacturer's certified pre-owned program, from a dealer, or from private parties. When buying any used vehicle, the best investment you can make is $75 to $150 for an independent mechanical inspection by a qualified mechanic.

• Certified Pre-Owned programs. Certified Pre-Owned programs have gained in popularity because the manufacturer offers excellent warranties on refurbished cars. Used cars returned from lease or bought on trade-in are subject to a rigorous inspection and the manufacturer makes whatever repairs are required to bring the car to a quality condition. Usually, the cars that qualify for these programs are under five years old and have less than 75,000 miles on them. To learn more about certified pre-owned cars, visit Kelley Blue Book.
• Used vehicles from a dealer. Although not backed by the manufacturer, many reputable dealers with brand franchises offer extended warranties or service programs on used cars. To offer these warranties, the cars are refurbished by the dealers to their own quality standards.
• Used vehicles from a private party. Buying a used car from a private party is the most risky method (no warranties or service programs here), but it may also be the cheapest route. You need to seriously evaluate the condition of a used car. Make sure the owner is in possession of the title or certificate of ownership. You'll need that to legally transfer the title to your name.

Evaluating used cars

A lemon, if you haven't heard the term, is a car that is prone to endless, expensive problems. Sometimes the sellers know the car is a problem and are trying to unload it; others don't know.

To find out if a car is a lemon, get as much information as possible about the car's ownership history, mileage, and maintenance record before you fall in love with it. Check for body damage—dents, dings, chipped paint, or scratches on the body. Inspect the car closely and test drive it carefully. How does the car drive? Do the brakes work well? Does the car pull in any direction? Do the tires match? Are they worn or new? If you're still interested in the car after your initial inspection and test drive, consider having the car inspected by a qualified mechanic. When buying any used vehicle, the best investment you can make is $75 to $150 for an independent mechanical inspection by a qualified mechanic.

Two big areas of potential "hidden" problems are odometer fraud and damage to the car from a prior accident. Odometers can be reset so that they no longer register the total miles on the car. Cars with accident histories may mask prior damage to the frame or major systems. Both of these can be checked, though, by getting a CARFAX vehicle history report.

Using the vehicle identification number (VIN), CARFAX reports on the vehicle's repair history. The report, which can be ordered online for a small fee, will check the title's history to see if it's been salvaged, flooded, or rebuilt. It will report on odometer fraud (has it been rolled back? broken?) and major problems in the past (has it been in a major accident? been salvaged? had fire damage? been stolen?). Finally, it will report on whether the car has ever been part of a lease or rental program.

If you're buying from a dealer, ask for a copy of the car's service record. If you're buying from a private party, ask if the owner has kept maintenance records that you can review. While buying from a private party usually means less cost, buying from a dealer usually means you get a warranty with the extra price. Make sure you read the fine print and know what's covered in the warranty and for how long. The warranty may mean you won't have repair costs for the life of the warranty, so it's worth the time to plow through the fine print.

Buying a hybrid

A hybrid may save you money—if you mainly drive in the city and you keep your car for a long time. The initial price won't look like a bargain—most hybrids have a manufacturer's suggested retail price of about $3,000 to $4,000 more than comparable non-hybrid cars. And since the cars are in high demand, there's not much chance the dealer will discount the car.

• Because of the use of an electric motor during acceleration, the greatest fuel economy comes during city driving when you're likely to start and stop frequently. Little benefit is incurred during highway driving, except during the quick acceleration necessary while passing other cars.
• Hybrids purchased or placed into service after December 31, 2005 may be eligible for a federal income tax credit of up to $3,400. Credit amounts begin to phase out for a given manufacturer once it has sold over 60,000 eligible vehicles. For more information on hybrid tax credits visit www.fueleconomy.gov.
• People buy hybrids for a variety of reasons: to lower fuel costs while racking up city miles, to drive in High Occupancy Vehicle (HOV) lanes with only one occupant (currently allowed in California and Virginia under certain conditions), or to benefit the environment by limiting fossil fuel consumption.

Kelley Blue Book has more information about hybrids.

Analyzing costs

How much should you pay? That's the big question. Your cost is a combination of the negotiated price of the car and your financing agreement (if you don't pay cash). The best way to make sure you get a good deal is to do your research, be prepared to negotiate, and get quotes from at least three different dealers.
When buying from a dealer, there are three terms you'll want to know: invoice price, manufacturer's suggested retail price (MSRP), and market price. You can find all these prices for both new and used cars at either Kelley Blue Book or Edmunds.

• Invoice price. The invoice price is the price the manufacturer charged the dealer for the car. Usually, any price you negotiate at or near the invoice price is a good deal, although it's worth trying to negotiate a lower price because dealers sometimes get the car for even less than the advertised invoice price. That's because manufacturers sometimes provide extra rewards to their dealers via holdbacks (money to the dealer from the manufacturer once a car is sold), special manufacturer-to-dealer incentives that can be worth thousands of dollars to the dealer, or volume incentives to dealers who sell a certain number of models in a month or quarter.

• Manufacturer's suggested retail price (MSRP). The manufacturer's suggested retail price is the price that manufacturers recommend their dealers charge for a particular car. The MSRP is usually thousands of dollars above the invoice price. Popular models that are in tight supply will sell for close to the MSRP. However, cars that are in less demand can generally be purchased for less.

These two prices, the invoice price and the MSRP, define the low and high end of the pricing scale, respectively, with hot cars selling at the higher MSRP and other cars selling closer to the invoice price (or lower with incentives).

• Market value: When looking at the market value of a car, focus on your particular geographic area and look at the selling prices people have actually paid for cars in the area. You can find the market value for a car at either Kelley Blue Book or Edmunds.

Edmunds calls the market value the True Market Value, or TMV. The TMV is the average price the car sells for in your area. It is adjusted based on car options, color, and incentives and is based on actual sales in your area. Edmunds also provides information on invoice and MSRP pricing for new cars. For used cars, Edmunds provides the TMV in three categories:

• Trade-in value of the car: This is what you can expect to receive from a dealer.
• Private party value: This is how much you could expect to pay if you buy from an individual.
• Dealer retail value: This is how much customers will pay for this car at a dealer

Kelley Blue Book calls the market value the "Blue Book" value. For new cars, Kelley provides:

• Invoice price
• MSRP price
• New Car Blue Book value: Price consumers are actually paying for the vehicle.

New Car Blue Book range: Range of prices people are paying based on thousands of cars sold across the country. Kelley also provides information on market conditions (limited release, heavy demand, etc.) to help you in your negotiations. For used cars, Kelley provides the following three Blue Book values:

• Trade-in value: What you might expect to receive at a dealer if you trade-in your car.
• Private party value: The price you can expect to pay if you buy from a private party.
• Suggested retail value: A representative dealer's asking price.

Financing cars

Loaning money is big business and most auto manufacturers have their own companies to arrange car loans. You can also make loans through banks or credit unions and even online. An auto loan will be arranged based on the negotiated price of the car and related expenses (sales tax, title, and licensing fees), your credit rating, the amount of your down payment, and the interest rate.

Most auto loans are from three to five years long—36 to 60 monthly payments. Different lengths of time can be arranged, if desired. The longer you take to pay off the loan, the lower the payments will be and the more interest you will pay. A typical car buyer today makes about a 5% down payment. However, it's probably best to put down as much as you can and choose as short a loan as you can handle. You may get more favorable loan terms and you'll pay less in interest.

While you are paying off the balance you owe on your car, the lending institution will hold the car's title. Once all the payments are made, the car's title is sent to you and you own the car.

Calculating payments

Many calculators are available online to help you estimate monthly car payments, including those that:

• Calculate a basic loan
• Calculate a basic lease
• Help you decide whether to buy or lease
• Help you decide whether to take a lower annual interest rate or a cash back incentive

Try these:

• BankRate.com
• Edmunds