Stop and go: Buying a used car in 7 steps

STOP 1: 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. A common mistake is to fall in love with a car that exceeds your budget, with frustrating -- or devastating -- results.

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. For drivers with good credit, there are low rates to be had -- 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 with higher interest rates.

Think about the down payment, and try to put down 20% to 33% of the purchase price. But don’t empty that piggy bank completely -- it’s important to always keep some cash on hand for emergencies.

If you decide 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 manage, since longer ones (some run seven years) end up costing more in interest. Keep in mind that interest rates on used-car loans are higher than those for new cars. Get a free copy of your credit report at annualcreditreport.com, and pay the extra charge to get your FICO score -- it’s the number between 300 and 850 that lenders use to determine what interest rate they’ll give you. The higher your score, the lower the interest rate you should be offered.

“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.”