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Sand it ALL out. You might use a Paint which is supposed to stop rust and turn rusted metal back into good stuff, But those are a mixed bag. Best bet is to get rid of the rust before you paint. An etching primer "etches" itself INTO the metal, not just sits on top of it.
Epoxy because some are water proof. You can leave a panel outside and it wont rust. This makes a better under coat for paint. Etch primers are also available in a wipe on format such as PPG's metal conditioner.
I like to use etching primers on new "fresh" metals.
We fabricate a lot of circle track body parts and on any aluminum parts or un treated steel, I always use the etching primer. On any oem type of body parts, I go with epoxy to seal the surface before I use a sandable primer.
I agree with flyboy, get it ALL then treat the metal with something like phosphoric acid. You should be able to get this stuff at any good paint supplier or home depot. Then use the primer.
The only way to do it right is to get "all " the rust, you may have to use some type of media blasting to get into the pitting or you may have to cut out the rusted area and replace with a patch.
DONT go to home depo, go to an automotive collison supply store and get the products from them. Tell them the application and the type of primers and paint you will use through out the job, if you dont, some chemicals react differently and may lead to big problems in your top coat when finished.