So you've decided to use the bank's money to buy your new pride and joy. Aren't you going to tell me I should be paying cash? In an ideal world it makes no sense to be borrowing for something that will fall in value as soon as you take it out of the showroom.

Life isn't perfect, however, and if you need to borrow it makes sense to minimise the costs.

How do I do that?

Work out the finance before you go shopping, says Tony Hoare, the chief executive of Melbourne Credit Union. Hoare says younger people, in particular, often go shopping for a car without having a loan pre-arranged.

If you find a car you want, it's tempting to take the convenient finance offer from the dealer without checking alternatives. Some dealer finance can be attractive, particularly for new cars, but Hoare says some carry interest rates as high as 18 per cent. Second-hand car buyers, in particular, will usually do better borrowing elsewhere.

Most lenders are happy to pre-approve loans for cars so you know how much you can spend before you go shopping. If you shop around for the best loan, you can save heaps in the longer term.

What sort of loan should I look for?
The question is whether you want a secured or unsecured loan. Orrock says buyers who own their own home are increasingly using redraw facilities on their home loan (or home equity loans) to buy cars.

That's the cheapest form of finance, but only if you are disciplined enough to increase your  repayments so that the car is paid off quickly. "If you just keep making your normal repayments you'll pay for the car two or three times over the period of your home loan," he says.

"In a recent poll we found 9.2 per cent of respondents had accessed their home loan to buy a car. It's a bit of a worry because in about three years most will trade that car in and not realise what it's really costing them."

An alternative is to use a secured personal loan that is structured to be paid off in a shorter period – such as three or five years. Most lenders now offer car loans which are secured by the car itself  and have interest rates of about 8 per cent. Hoare says the interest rate will often vary depending on the age of the car, as new cars are regarded as being better security.

Orrock says some lenders have restrictions on the age and/or value of cars that can be financed with a car loan and they are often available only for newer used or new cars.

Those who don't qualify for a car loan may be able to use an unsecured personal loan, though this carries a higher interest rate. Orrock says these loans are currently charging about 11 per cent, but have become more flexible in recent years if you want to pay them out faster.