It’s usually a good idea to take stock of your money situation and work out your budget. This can help you decide how much you can put towards buying a car and whether it will be new or second hand. It will also give you an idea of how you’ll manage with the ongoing costs.

If you’re selling your existing car, find out if you can trade it in (to a dealer) to offset the cost of your next car.

From May 2009 until March 2010 you may be able to get a £2,000 discount on a new car if you trade in a car older than ten years, in a new government-backed scheme.

Or, you may get a better deal if you sell it yourself, but don't part with it until you're sure the payment is genuine. If in doubt, contact your bank.

There are advantages and disadvantages to getting a new or used car. Generally, new cars drop in value practically from the minute you drive off, but may possibly hold their value over the longer term, depending on the make and model. You may get a special deal buying new, for example, a warranty or servicing option, and you won’t have to worry about an MOT for a few years.

A second-hand car is cheaper to buy, but make sure you check out its condition and find out as much as possible about its history.

Your decision will depend on your budget, how long you want to keep it for and any added extras you want, such as warranties, servicing, and trade-in options. Whatever you decide, make sure you understand your rights.

Buying directly from the current owner might seem cheaper but it is also riskier: the car may be stolen, or it may have been used as security for a loan or hire agreement and actually belong to a finance company. It’s always a good idea to complete an HPI check on a car and this might show up any outstanding finance or insurance claims made on the vehicle in the past.

Alternatively, the owner may have taken out a loan using the car as security, but not repaid the loan. This type of loan is known as a ‘logbook loan’ and means that the car is subject to a bill of sale. In this case, the car could be repossessed from you at any time. Bills of sale are registered with a court. To find out whether a bill of sale is attached you will need to search the registry at the High Court – where all bills of sale must be registered. If the owner, lender or car are outside London, a copy of the bill of sale must be sent to the local district judge too. If you wish to search the register, either centrally or locally, you must go to court in person and pay a fee.

The moment you drive a new car off the forecourt, it starts to lose value through car depreciation. Second-hand cars can also lose value, but more slowly. Cars lose value every year, so it’s important to know how this will affect you, especially if you buy with credit or a loan that will take several years to pay off. You may find that when you come to sell the car, you owe more than you can get for it.

Whether you buy using your savings or borrow money from friends or family, it’s considered a cash purchase. You may be able to negotiate a better deal if you pay in cash. But beware of paying cash in a private sale unless you know the individual and are sure the car paperwork is genuine.

If you borrow from a bank or a loan company or pay by credit-card, make sure you understand how much it will cost you over the life of the loan by checking the APR (Annual Percentage Rate), and think about how the value of the car may change by the time you finish paying for it. A personal loan from a bank is usually cheaper over the longer term, but shop around to get the right deal.

Many dealers have finance arrangements, such as hire purchase (HP), 0% finance, lease, or personal contract plans (PCP).

Find out how the different options work and which one may be right for you. Some may advertise a flat rate to make the deal look cheaper, but it may not take into account the fees and charges. You can use the APR to find out the whole cost of the loan. All lenders have to tell you what it is so you can compare like with like.

Every car registered in the UK must be taxed and display a valid tax disc when used or kept on a public road. You could face an automatic penalty as well as a fine if you don’t have one. Your car could be clamped or towed away and destroyed. Find out if tax is included when you buy and if so, how long it’s valid for.

The MOT scheme is in place to help ensure all road vehicles are maintained to a minimum standard. Apart from the first three years for a brand new car, you will need to pay for an MOT test once a year. If the test finds fault with your car, you’ll be advised to fix the fault before it can pass the MOT and be roadworthy again.

You have to take out motor insurance before you can drive your car in a public place. There are different levels of cover to choose from. Motor insurance protects you, your vehicle and other motorists against liability in the event of any accident. It is illegal not to have any form of motor insurance.

Shop around to get the right deal for you and make sure you understand all the features, especially the exclusions and any excess.

Filling your car up is an ongoing cost for most people, so think about how this may affect your budget. The type of car you own, the way you drive it and the fuel you use can make a big difference to the impact on your money and on the environment.

Following Directgov’s greener driving tips could help you save a month’s worth of fuel over a year, as well as reduce your emissions.

Servicing packages are often available from manufacturers and dealers, but what they cover will vary so make sure the benefits justify the cost.

There are a number of things you can do yourself to help keep your car in working order and minimise costs.

Unless you have a private driveway or garage you should consider where you will keep your car. Many local areas, especially close to city centres, operate parking schemes to help cope with limited space. Find out if there are local restrictions and what it might cost you to get a permit.

You have to have motor insurance to drive your car on a public road. However, there are different types of insurance you may be offered or want to consider.

Most new cars come with a standard new-car warranty provided by the manufacturer which should protect you against mechanical failures and defects, but the terms and conditions can vary.

When considering an extended or used-car warranty, check out all the features and requirements, such as mileage and servicing restrictions.

An unexpected breakdown can be a stressful and expensive experience, so you may consider becoming a member of a breakdown service.

There are many different services and levels of cover available, so shop around for the right deal for you and compare all the features as well as the cost.

PPI is usually offered with a loan or credit card and aims to help you keep up your loan repayments if you can’t work because of involuntary unemployment, accident or illness for a set period of time.

You do not need to take out PPI to get a loan. Make sure that any PPI you take out is right for you.

Gap insurance can cover you against financial loss should your car be stolen or written off, filling the gap between the current market value at time of theft or write off and the original purchase price plus any outstanding finance.

Most gap insurers will require you to have taken out fully comprehensive motor insurance. Before you decide to buy, check the extent to which your fully comprehensive policy would cover you for this anyway, particularly in the first year, as well as the exclusions and limitations of the gap policy.

There are other types of gap insurance, for example to cover the difference between the outstanding balance under the finance agreement (HP, PCP or lease) and the total loss settlement offered by insurers in the event of a vehicle being written off.

If you decide you need this, shop around to get the right deal for you.