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The best way to buy a car is to pay cash. Financing a car is usually a means to buy more car than you can actually afford.

With that disclaimer, I know the vast majority of people won’t pay cash for their cars. It takes time and discipline to save up the money, you have to buy less car than you could if you got a loan, and you have to wait.

If you are dead set on financing a vehicle anyway, let me encourage you to make as much of a down payment as you can afford.

There are at least three good reasons to make a down payment:

The first is called being upside-down or buried in your car. This just means you owe more than your car is worth. If you put money down, you put yourself in an equity position that makes it possible to sell or trade-in your vehicle at any time. If you lose your job and realize you don’t really need that Lexus, you can sell it to Carmax right now for more than you owe because you put money down.

Another reason to put money down is that banks like to see cash. If your credit has a ding or two, the bank is a lot more likely to give you a loan with more competitive terms if you show you are committed. The risk of you not making a $350 car payment when you put $5,000 cash down is very low.

Finally, dealers like cash. If you want to wheel and deal to get the best price possible but you have no money in the bank, you have one less negotiating tool going for you. You are at the mercy of the dealer and the bank.

Dealers have to do extra work and pay extra fees for customers who are higher risk. Depending on the bank, simply not having money down could be enough to put you in high risk territory. The dealer is thinking of the costs of getting your loan done and paying the fees on top of the minimum profit he has to sell the car for to make money. If you come to the table with a large down payment, you can quickly change the dealer’s perspective.

Cash is still king. For the reasons above and others, let me encourage you to save up a down payment for your next car purchase. You’ll be more secure in your car, you’ll get better terms from the bank, and you’ll get a better deal at the dealership. Why wouldn’t you put money down?

The vast majority of car buying mistakes are made before buyers ever set foot in a dealership. By the time you go to a dealership, you should have already made the most important and difficult decisions you’ll need to make.

The only way to accomplish this is to do your research before hand.

Financial Research

Most of us make buying decisions based in large part upon our financial situation and philosophy. If you are a cash buyer and have $10,000 to spend, then you need to buy a car for about $9,000 plus taxes and fees.

If you are financing and you have a budget of $350/month for car payments, then you can use a car loan calculator to estimate what your price range will be at various rates and down payments. You’ll need to be realistic about your financing options, based on your credit score.

Pricing Research

Now that you know what your car budget is, you need to figure out which cars are in your price range. Are you looking for a car, suv, or truck? What mileage range should you expect?

It’s easy to get unrealistic at this point. Sure you want a 2009 BMW M3 for $10,000 – but you won’t find any. Figure out what you want, then go to a site like KBB.com and look at the book value. You can expect to pay somewhere between wholesale and retail book.

A vehicle with higher demand will be closer to or above retail whereas more common vehicles with lower demand can sometimes be had for at or below wholesale. At this point, you should have a really good idea of your budget and which vehicles would fit inside your budget.

Quality and Reliability Research

Based on your list of cars that realistically fit in your budget, the next step is figuring out the quality and reliability ratings of these vehicles. There are lots of good sources for this information, but the best start is to Google the type of car you are looking for and just start reading. Consumer Reports and Edmunds are two good sources as well.

You may like the way a particular car looks, but realize the reliability is poor. You may be able to sacrifice reliability ratings to get a car in your price range with lower miles. At least you get to think about these decisions ahead of time.

Research, Research, Research

As we consider how to buy a car, the most important step is the first: research. An educated buyer will have a better, more enjoyable car buying experience and will make fewer mistakes than an uneducated buyer. Take the time to do your car buying homework. You’ll be glad you did.