You should first research the going market values, using either the NADA or Kelley Blue Book. Your negotiation will be framed by three variables: the Retail price, the wholesale price, and the amount covered by financing. Typically, banks will loan 80% of the new value of a car, expecting you to cover the remaining 20% either by downpayment or with a trade-in.
And with dealer incentives and holdbacks, it is quite likely that the dealer is actually paying less than the published wholesale price for this car, giving you additional room. In the back of the NADA or Blue Book Guides, there are option value charts, which tell you what to add or subtract for mileage, options and drive train.
Before test driving the vehicle, you should look at and test every option available, both inside and outside the vehicle. Point out all faults and non-working components found at this time, to help with negotiating the price later on. If at this time you have found nothing really wrong with the vehicle, you can decide if its worth trying out for a test drive.
During the test drive, point out all noises and obvious problems with the vehicle. Ask about everything you are unsure of. There are no stupid questions or comments at this time
Now it's finally time to negotiate the selling price. Even if you want the vehicle very much, don't let the seller realize this. Act like you have researched the average price of the vehicle and always come in with a price at least $500-$1000 less than the asking price.
Be ready to commit to the deal if a reasonable price is agreed upon. In most cases, a person who is looking to sell a vehicle will not turn down a reasonable cash offer. If the seller turns down your offer, either make a new offer or wait for a counter offer. After you make your initial offer, do not speak again until he answers (it's a game of mental chicken: you cannot afford to lose). If the person does not accept, they will usually counter offer with a price in between the asking price and your offer.