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1. Determine your financial situation
This is the first and most important step in the car buying process. You must know how much you can spend before you can determine what you can afford. You don't want to get stuck making a bloated car payment that will leave you eating bologna sandwiches for three years.

First of all, you need to have a monthly budget. This is very easy to calculate. Add up all of your fixed monthly expenses, such as your rent/mortgage, phone bill, etc. Subtract that from your net income. Then subtract your estimated extraneous expenses, such as food, gas, entertainment, whatever. The result should be an amount of money you have to play with.

From that, you need to remember that buying a car involves more than a down payment and monthly payments. In your budget you will need to include licensing, registration and other hidden costs, as well as monthly insurance costs, gas and maintenance.

Once you have all of this worked out, you should have a ballpark figure of the budgeted amount you can use for car payments. A good rule of thumb is roughly 20 percent of your net income can be used for a car payment. Once you determine that figure, stay with it.
2. Decide which car you want
Now that you have settled on a monthly allotment, now you can look at which vehicles fit into your price range.

This is really about personal choice, but a good criteria to go buy is to look at what your needs are. Do you have a family? There are plenty of affordable, safe and reliable minivans and station wagons on the market. Single and commute, or do a lot of city driving? The compact segment has a wide range of models to choose from that boast handling and superior gas mileage. Do you use your vehicle for work-related tasks, such as hauling, delivery, etc? Check out the many light and heavy-duty pickup trucks and vans. Midlife crisis? There are several convertibles and sports cars that will make you feel young again.

Also consider your wants. Compact cars get really good gas mileage and are a great if you want to save money on the increasing gas prices. Plan on taking road trips? Consider something that gets good mileage and has cargo space and lots of cup holders. Plan on going off-roading? The SUV is your best bet. Some even come with a first-aid kit!

Once you've narrowed your choices down to a couple, it's time to do some car research.
3. Do your homework
All right, Columbo. Here's where you will need to spend some time sorting through some details, but it will be worth the effort in the end. After all, the more you know about what you're buying, about whom you're buying from, and about the buying process itself, the more money you will end up saving.

There are plenty of places for you to do your car research. Check out the Internet and newspapers, contact car dealerships, credit unions and local banks to see what kind of deal you can get. Knowing what a car dealer's competition is offering can only help you out in the negotiating process.

Look at interest rates. You'll want to get the lowest possible interest rate, as it will help you pay less in the long run. Many car buyers focus on getting the lowest possible down payment. If a car dealer gives you a low down payment, the money you are saving has to be made back. Car dealers will find ways to lower your down payment, and as a result will find ways to compensate for their generosity. By deferring the down payment "savings," with interest, you'll end up paying more in the long run.

Also be aware of factory-to-dealer incentives. The secret is that the manufacturer refunds a certain percentage of the car's price to the dealer. So even if the car dealer sells you a car at the invoice price, he or she will still make money from the deal. Find out about a manufacturer's incentive percentage, as they are public information.

You should also look out for rebates. When incentives are offered, this often means the manufacturer wants to either get rid of slow-selling cars or reduce the inventory. Therefore, they may also offer the buyer a cash rebate and a low financing rate, or an option of one of the two.
4. Go to the car dealerships
Now that you have an understanding of what kind of rate you will be offered, you now want to go out to the car dealerships. You already have an idea of what kind of car you want, how much you can spend and what kind of perks you can get. Also you have an idea as to what different car dealerships are offering. This is quite a bit of information for you to carry with you into the negotiating process. But again, the more you know, the better off you'll be. But remember: Car dealers are professional negotiators and do it everyday. You are a novice and will be treated as such. The car dealers aren't going to be easy on you, nor are they going to point out all the ways you can save money. It's up to you to find all of those.

Also remember that you are in control at all times. You have the right and ability to stand up and walk out of the office at any point and the dealer will lose the sale. Don't let a car dealer intimidate you. Be relaxed and comfortable you know all the information and that you hold all the cards.
From:http://www.automotive.com/auto-loans/36/loan-tips/car-loan-tips.html