Could just need new tranny fluid.  I had a friend who sold a car real
cheap because they couldn't shift at all.  Flushed/filled with new
tranny fluid and the car shifted/ran perfectly fine.  Still on the
road to this day.

Might try that, although considering what a sign of neglect it would
be -- you might watch out.  $500 though is pretty cheap if you don't
end up with too many repair bills.

Is the transmission an automatic or a manual?  If it is an automatic, I'd
pass on the car.  If it is a manual, check the shifter and shift cable
adjustment.

Sounds are difficult to diagnose without hearing them first hand.  If the
metallic noise is a knocking noise, pass on the car.

160,000 miles isn't new, but $500 for a car that still has $3K plus
book value is a rather healthy discount already.  You just need to
make sure it isn't going to cost more than that to get it back in
shape, and get another 100K out of it.

 Do NOT buy this car if you don't plan to keep it a while, because
you want to drive the value out of the repairs, for at least 60K
miles.

 And do NOT buy it if the repair prices exceed the book value of the
car in good shape, because you can invest the money in repairs...
And then the car gets stolen or totaled in a wreck and you lose your
investment, since the insurance company isn't going to give you more
than book without an epic battle.

I would suggest two things:  Get the engine and car checked out at
YOUR local mechanic - NOT the seller's mechanic, there may be a
serious conflict of interest there.  As in he's deliberately lying for
his friend.

There are several inexpensive things that can make noise on the
engine, as well as some expensive ones, they can isolate it.  And tell
you what the overall cost of getting the car into road-ready shape
will be, and break it down between the things "needed now" (like the
timing belt is a must) and those that are "needed soon."

 There are some items that you replace simply on time or mileage,
like the battery, belts and hoses, and radiator.  If they are all
originals, they may be due to fail even if they're working fine now,
so look at their age and condition carefully.  The new plastic and
aluminum radiators are cheaper and more reliable when replaced than
trying to fix the old one.

 And if your mechanic can't pin down the what and why, have the
transmission checked out separately by a transmission specialist.
They are the ones who know them inside out.  

 It may not need a full transmission rebuild, but that's the safe way
to go once they have to take it out for anything (especially with a
lot of miles on it) - the labor to remove and replace the transmission
is always a big chunk of the overall cost, so you only want to do it
once every 150K miles...

 They haul out the transmission and tear it down to check it over,
and only change what's really worn out or broken, which can save you a
lot of money - but you still want to find out what the "worst case"
price is, in case they find "surprises" and it needs everything.

   --<< Bruce >>--