In a perfect world, used cars are dirt cheap, have no nasty surprises and run forever. Nice theory. The reality, though, is that when you're looking at used cars there are some things you should walk away from, and others which you can live with or fix.

First up, the car must be straight and roadworthy. Mechanical problems can be fixed, but if you buy a car with a bent or rusted body you have basically done your money. Its next owner will be a wrecker.
 
Check for rust by looking inside the boot, the floor wells (lift up the carpet), doors and and door sills for red or brown stains, dimpled or bubbled paint.

Run a fridge magnet across the exterior body panels. If it doesn't stick, rust or accident damage has been repaired with plastic filler, which won't last. Misaligned panels and different paint hues are also indicators of accident damage.

Check the engine bay and boot for signs of non-original paint as well. If a car has been properly serviced according to the manufacturer's schedule, it should be in reasonable mechanical condition. Every new car comes with a handbook, with pages which are filled in at each service, stamped and signed by the workshop.  
 
If the car you're looking at has a complete service record, it is a good start. Check the kilometres on the clock correspond with the most recent service kilometres. If there is no supporting documentation with the car, you have only the seller's word to go on. The seller might be a very nice person, but then again...

Do some basic mechanical checks before a test drive. Have a look at the oil. If it is in good condition, it will be translucent and honey-coloured. 

Old, dirty oil is black and has a burnt smell. If this is what you see when you pull out the dipstick, assume that the car has either had a hard life, or been neglected. 
 
The other main indicator of engine condition is the coolant. This must be checked when the engine is cold. Remove the radiator cap. The coolant should be clean and brightly coloured - usually green or orange.

If you can see rust in the coolant, oil floating on top, or a white, creamy sludge around the cap, this indicates a cooling system in poor condition or, worse, a cracked cylinder head or leaking head gasket. Both can be fixed, but you're looking at several hundred dollars minimum. 
 
Time for a test drive. The engine should start immediately and settle straight away to a smooth, quiet idle. Any knocking or rattling noises are bad news. Remove the oil filler cap while the engine is idling.

Oil fumes can indicate worn rings or cylinders, which are expensive to fix. Let the car idle for a minute then ask the seller to give it a rev while you stand behind it. Watch for blue smoke from the exhaust - another sure sign of a sick or badly worn engine. 

On the test drive, the car should run smoothly, without hesitation. The brakes should pull the car up straight, with no noises or pulling to one side. The same goes for the steering - the car should track in a straight line, with no tendency to pull to one side. 

The gears in a manual should engage smoothly and quietly, and there should be no clutch slip. An auto should change gears quickly and smoothly too. If you feel a thump, or the shifts are slow, slurred or noisy, the auto could be in need of an overhaul. 

If no alarm bells have rung so far, you're doing well. The next step is an NRMA Vehicle Inspection , which will find any problems you have missed.