Where do You Buy?DealersOne of the most obvious places to go looking for a new instrument is a dealer. A dealership offers certain measures of security. Often there is a warranty. Sometimes the dealer will include a service package of some kind, or offer it to you at a discount or something. Judge for yourself if an individual service package is worth the money, but consider this: if you're really buying a quality instrument, it shouldn't need any serious maintenance within the first year or so. I've owned a couple of my instruments for more than ten years, and despite the fact that I have disassembled and reassembled them a few times, I have yet to require the services of a dealer's repair shop. Dealers will also probably have a fair selection of instruments from which to pick, as well as an isolated room or studio from which to try them out. If you are a beginner, this is not such a big deal, but for those with more demanding tastes and expectations, this is a must. On the down side, dealers are going to probably charge you more for the instruments they offer. Because they have to make a profit, they are more likely to offer an instrument at close to the "retail" price: this means that your $500 won't go as far in most dealerships as it might elsewhere. This is not true everywhere, of course. Back in the Rio Grande Valley of Texas (where I grew up), there is a store in downtown McAllen called Hermes Music; Hermes consistently offers some of the lowest instrument prices on the planet. The service ain't great, and you'd sure better be able to speak Spanish when you go in there (some of the salespeople honestly don't speak English!), but if you can stand the wait and the translating, you'll save some money. 
Pawn ShopsAs a pawn shop aficionado and lover, I am going to sound a little biased about the shopping preferences. If you know what you're looking for in a guitar, a pawn shop can be a gold mine. But like a gold mine, you're going to have to slog your way through a lot of dirt, rock, and fool's gold to find the nuggets. If you genuinely enjoy the process of looking, then finding the occasional nugget is easily worth the time it takes you to get there. And as loathe as I am to criticize this consumer forum, there are some caveats that you should bring with you when you enter a pawn shop. There are any number of reasons that could have prompted someone to pawn an instrument (or anything else, for that matter). It could be that some unfortunate soul was just desperate for the cash. But it might also be the case that the instrument is damaged or unsatisfactory in some way, and that the owner thought that selling it to a pawn shop would be easier than actually trying to market it "for real." It could just as easily be that this same "poor soul" is in possession of a stolen instrument.
Mail-order CatalogsThose of you who already get some sort of mail-order catalog will already know about some of the potential benefits of ordering through the mail. Mail-order companies generally do a much higher volume of traffic than your local store, and will consequently be able to pass greater savings along to you as a consumer. But ordering from a catalog is not nearly as gratifying as running down to the local store and fondling the very instrument you intend to take home. You have to have a certain amount of patience (even with 2-Day FedEx) to order an instrument and then wait for it to show up at your door. Furthermore, ordering from a catalog means that you won't be able to give your purchase a test drive before taking it home. This can be good and bad. The fact that you will first get your hands on the instrument at home (rather than in the music store) means that you will probably get to "test" it in the conditions under which it will most likely be used. Naturally, this will give you an accurate picture of the instrument's performance. The down side, of course, is that you have to wait for it to show up. Most companies have a return policy, so you can return an instrument if it's really not working for you, but this again takes time.
LuthiersMichael Masterson wrote me and reminded me that I should not exclude Luthiers (or guitar makers) in my description of places to find and purchase guitars. As Michael pointed out, though most beginners won't want to spend the bucks to get a custom-made instrument, some will. He also pointed out that some makers have already-made guitars for sale, especially relatively new luthiers, some for as low as $800.Examples of luthiers include:
The bottom line? You can get a good guitar from any of these sources, but you're going to want to keep each source's limitations in mind when shopping there.
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