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.

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.

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