When you're ready to buy a new car, you have three basic methods of paying for it: cash, loan, or lease. Most people don't walk into a dealership and plunk down $20,000 to $30,000 in cash for a new car, but if you're one of the few who are able to do this, or if you're financing part of the car but making a very large down payment, there's only one important factor you need to consider.

Paying cash will save you several thousand dollars in interest charges. But before you use your cash to avoid paying 5 to 7 percent interest on a car loan, you should have all your credit card or revolving credit loans paid off. It doesn't make sense to use cash if you have credit cards with higher interest rates than those of new car loans.

Financing Through a Bank or Other Lender

Most people finance the car through the dealer or their own bank and make monthly payments. The car is collateral for the loan, meaning that if you miss a payment, the lender can repossess it. The typical car loan used to be three years, but five-year loans have become very common. This makes a new car more affordable because the payments are spread out over a longer period, but it also costs more in interest charges. This can make you “upside down” on your loan if you decide to trade the car in for a new one in a few years. Being upside down means you owe more on the loan than it's worth. If you try to sell it while you're upside down, you'll have to pay cash in addition to the balance on your loan. You can prevent this by using the shortest loan period possible, preferably three or four years.

Car manufacturers often promote special offers to entice potential buyers. Very low-rate financing or even 0 percent interest loans are sometimes offered, but dealers who offer these low rates won't always negotiate on the price of the car. You may find it's cheaper to negotiate a lower price and get your financing elsewhere even if the interest rates are higher. In fact, you're better off arranging your financing yourself through a local bank or credit union, especially if you don't have great credit. People with bad credit often get fleeced in the finance department of the dealership. In addition, you want the auto purchase to be about one thing only — the price you pay for a vehicle and the value you get. Financing through the dealer opens you up to the risk of them “shifting” costs around.

Don't take anything at face value when you're buying a new car, and don't make your decision based on the monthly payment alone. The payment is influenced by the price of the car, the length of the loan, and the APR. You could have what seems like an affordable monthly payment but end up paying far too much for the car by the time you pay it off. If the salesperson keeps pushing that great monthly payment when you're trying to negotiate the price of the car, you might be better off walking away if you can't convince him that you're too savvy to fall for that ploy.