Know What You Can Afford
Before you even decide whether you want to buy a new car, a used car, or lease a car, you should figure out what you can afford.
Create a budget by factoring in all your monthly expenses and your net income (take-home pay).
When estimating your car-related expenses, consider the amount of your down payment, the length of the loan, the interest rate, and what the amount of your monthly payment will be. In addition, you'll need to budget for tax, registration (cost of tag/annual tag renewal fee), gas, routine maintenance, repairs and car insurance.
You'll also want to take into account the trade-in value (or loan pay-off) of your current vehicle and consider whether you're better off selling your car yourself versus trading it in to the dealer. If you are "upside down" on your trade-in (you owe more on your car than it's worth as a trade-in), think carefully about whether now is the best time to buy another vehicle. Any amount still owed on the trade-in will be included in the loan for your new purchase, and this might perpetuate the cycle when the time comes for your next trade-in. It may also subject you to less attractive lending terms or require purchase of "GAP" insurance to protect the lender's interests. You should also be aware that if you still owe money on your current vehicle, there is a possibility that a disreputable dealer or one who is in financial straits may not pay off your lien, despite promising to do so. Therefore, be sure that the dealer you choose has an excellent reputation, see that the written contract includes a promise to pay off the lien on your trade-in, and follow-up with your lien holder within 30 days of buying the new car to confirm that the dealership has, in fact, paid off the lien. However, despite any promises in your contract, if the dealer does not pay off the loan on your trade-in, you are still responsible for the loan.
Once you've determined what you can afford to pay, make sure that you stick to your limit!
Next Step: New vs. Used