Owning a car signals adulthood and taking out your first car loan is a rite of passage for many young people - although a cynic might tack on the words "lifelong debt".

Up to 70 per cent of all vehicles sold in New Zealand are bought with some kind of financing attached, according to the AA.

For lucky Kiwis that will be interest-free money from the bank of mum and dad. But most first-time buyers borrow from banks and finance companies, and unless you have a good understanding of how the finance thing works, there can be costly pitfalls.

The first thing to get your head around is that interest payments mean you'll pay far more than the ticket price for the vehicle. You'll almost always have motor vehicle, and loan repayment insurance, and establishment and other fees added on to the loan, so you've often clocked up another couple of grand before you make the first payment.

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There is a rule of thumb, says Henry Lynch, chief executive of Co-op Money NZ, that you should never buy a car that you can't pay off within 36 or 48 months.

Although a 60-month loan may have lower monthly payments, the increased number of months you pay interest for adds up to a higher overall cost for the vehicle.

At the same time your wheels will be depreciating at up to 20 per cent a year, points out Lynch. So in theory a $10,000 vehicle might be worth just $5000 or $6000 in a few years.

Yet a $10,000 loan at 12.99 per cent with $2000 of loan fees and insurance added on top will end up costing you over $14,500 over three years, or $15,400 over four years.

That's a lot to pay for a car worth $6000, if you're lucky, and can send some young people into a spiral of debt that just gets worse.

It's a really good idea, he says, to apply for finance from your bank, credit union or other financial provider before going car shopping.

All too often, says Lynch, car buyers fantasise about their first or next gas guzzler and bite off more loan than they can chew. Young and not so young people are often dazzled into buying more than they can afford in a car yard, because there's always a better car to choose or the slick sales pitch, which might not spell out the total cost of buying on finance, snares you.

Typically sales people or finance companies focus on the weekly repayments because the figure sounds small. You'll almost always pay less in the long run through a bank or credit union than you would if you take the finance on offer at the car yard.

Currently car/personal loan rates vary between 9.99 and 19.50 per cent interest through a bank or credit union. It's easy to pay up to 27 per cent through car yard finance.

Young and not so young people are often dazzled into buying more than they can afford.

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If you have bad credit, however, there will be fewer lenders who want to take you on. Car buyers who fall into this category can also borrow from peer to peer online lenders but should expect to pay more than those with a good credit history. For the people who pose the worst risk rates can top 30 per cent.

Though loan protection insurance is notorious for having get-out clauses and not covering seasonal and self-employed contractors, it can and does save some borrowers' bacon when they lose their job or run into other financial trouble. Lynch says it's a relatively small weekly cost for some peace of mind.

Anyone who does run into trouble with paying their car loan ought to take a long hard look at the Responsible Lending Code.

In plain English this says that lenders such as finance companies and banks aren't allowed to lend to you unless you can actually afford the loan. They are also required to consider cases of financial hardship.

Independent dispute resolution service Financial Services Complaints Limited has investigated a number of cases where finance providers have not complied with the code - sometimes because they didn't understand the subtleties of it.

If you can pay for your new wheels with cash and avoid borrowing you'll pay far less over the long run and have that money available for other things.

Top tips:

• Arrange your finance before you go car hunting and shop around for a good interest rate.
• Pay the loan off over the shortest possible period. If possible, overpay whenever you have spare cash. It reduces the overall interest significantly.
• Make sure you insure the vehicle and consider taking loan protection insurance if you're in a permanent job.
• Don't buy more car than you can truly afford.
• Don't upgrade your car unless you really truthfully have to.