When you are buying a car, it’s easy to see your cash going up in a puff of exhaust fumes.

Prices differ widely between dealers - even for the same make and model. An extra percentage point on a hire purchase deal can add hundreds of pounds to the final bill. And that’s before running costs, road tax and insurance.

So if you have your eye on a gleaming motor, do your homework first. There’s nothing a car salesman likes more than someone who is clueless about the market and happy just to know what the monthly direct debit payment will be.

Shop around. Test drive at traditional dealerships, then check online or visit car supermarkets. Look at the websites for Which?, the AA and What Car? to get the best deals and advice.

Consider whether you need a new car. Typically, they lose 20 per cent of their value the moment they are driven off the forecourt. Buying a car which is a year old or more could save thousands of pounds.

If you are buying secondhand, find out about the car’s history using the AA’s Car Data Check - pound;36.99 is a small price to pay for peace of mind.

Once you have found your dream machine, think about payment options. If the car comes with a 0 per cent deal and you have the deposit, you really have nothing to lose. But if you choose a hire purchase agreement - repaying the balance plus interest on a monthly basis - don’t just go for the dealer’s option. Check out cheap loans on a comparison website such as moneysupermarket.com.

And if you do decide to buy on HP, if anything goes wrong with the car during the loan period, the lender and dealer are jointly responsible for repairs.

If you want worry-free motoring and to change your car every couple of years, consider a car leasing plan.

Personal Contract Purchase (PCP) allows you to pay a deposit and then low monthly instalments over a fixed period. Pay a lump sum at the end to keep the car or hand it back and pay nothing.

Alternatively, sell it privately to pay off the balance. Personal leasing plans are similar to PCPs, but you cannot buy the car at the end of the fixed term. See Drivesupermarket.com to compare car leasing deals.

Adding the cost of a new car to a low-rate mortgage is another option, but pay it off quickly to make the low interest work for you. Remember to check what the car’s annual running costs are. The AA (www.theaa.com) details pence-per-mile.

Although green cars are still pricey, they are cheaper to run. Road tax costs you pound;50, fuel and insurance costs are also cheaper and the cars are exempt from the London congestion charge

KEEPING THE COSTS DOWN

* Buy the smallest car for your needs

* To get the cheapest fuel prices, sign up to Aapetrolbusters.com

* Stick to 70mph on the motorway - travelling over that speed pushes up costs

* Service your car regularly

* Switch off the air conditioning

* Remove the roof box if you don’t need it Source: AA.