Purchasing a car should be a two-step process: first you do your research on cars; then you do your homework on finance options. Otherwise you might find yourself swept up in the excitement of the purchase and lumbered with an expensive loan.

A media spokesman at consumer group Choice, Christopher Zinn, says 40 per cent of new-car buyers arrange car finance before going to a dealership. "If you are negotiating on the price of a new car - and, of course, you should negotiate if you go to a dealership because their first price is just that - you are in a stronger bargaining position if your finance has been pre-approved."

Zinn says having pre-approved finance gives you leverage to focus on a better price or free "extras" with the car, rather than negotiating on the loan.

"If you don't have finance worked out and you're in the car yard, they'll have something convenient and ready for you - but it might not be the best deal," Zinn says. "It's better in the cold light of day to work out what you can best buy."

There can be huge variations not only on interest rates but also on the fees associated with car loans, so by doing your homework before going to the dealership, you'll be better prepared to assess whether the car finance company is offering a competitive deal.

"Those who ask the good questions are likely to get the better deals," Zinn says.

An analyst at financial comparison website InfoChoice, David Lalich, says that, typically, people will do their homework on the type of car they are going to buy - and they should also be doing their homework on the type of finance.

"Definitely don't rush into signing on that day," Lalich says. "Car dealership finance is essentially about providing convenience and that doesn't necessarily convey the best rate."

As a starting point for research on car loans, financial comparison sites such as InfoChoice, Canstar Cannex and Mozo provide consumers with information for comparing car-loan deals from financial service providers. However, they don't usually include offers direct from the car-finance companies.

Lalich says most car loans are structured as personal loans, secured against the vehicle, and it is worth looking beyond the big four banks to smaller banks, credit unions and building societies as they may offer deals to attract new customers through competitive car financing.

You should also contact your existing financial provider to ask if they will offer you a "relationship discount", which may be better than advertised rates.

Lalich says some car-finance deals can be competitive and are worth investigating but are often restricted to specific car models or for new cars only.

There is also much more to consider than simply the interest rates on the loan. "It may be the case that a lower interest rate is not necessarily a better deal if they charge more ongoing or upfront fees," he says.

Lalich says it's important to check that there are no penalty fees or high exit fees and it's useful to have the flexibility to pay off the loan more quickly than the set term.

The lowest interest rate for borrowing money to buy a car will usually be through your home loan. However, a financial planner from Roskow Independent Advisory, Matthew Ross, says only the most disciplined borrowers should consider this approach - and do so with a plan to pay it off over a short-term period.

"Be careful," Ross says. "The benefit of the car loan is that they'll force you to pay it off over five years, whereas if you borrow it against the house, the banks will give you the option to pay it off over 25 or 30 years," he says.

"If you pay $35,000 off over five years, the amount of interest you'll pay on an 8 per cent fixed rate will be $8400. So a $35,000 car has cost you $43,400. [But] if you roll [the car loan] into your mortgage and take 25 years to pay it off, you'll pay $36,400 interest, so the car will end up costing you $71,400. You're doubling the cost of the car."

Ross says it is important people consider their car finance in the broader scheme of their financial position and he usually recommends clients pay for the car outright - either in cash or by using money in an offset account.

"If they have cash or investments sitting around it would be better to redeem those," he says. "Borrowing money to buy an asset that's going down in value makes no sense. It just adds to the cost of this thing."

Ross also advises clients to ask themselves whether they might consider buying a cheaper car and reminds them that even $5000 channelled towards investments rather than a depreciating lifestyle asset can make a significant improvement to their overall financial position.

"First of all, ask yourself: 'Do I need a new car? How much am I willing to sacrifice for a new car? Will it take longer to pay off my house, or will I need to go into retirement later, or go to less restaurants?', Ross says.

"You are buying an asset that depreciates, so you need to assess whether it will weaken your financial position."

Key Points

Buying a car is a two-step process: do as much homework on finding the best finance deal as finding the best car.

Check financial comparison websites, such as infochoice.com.au,canstar.com.au/car-loans/ or mozo.com.au, to compare car loans.

Check the fees — establishment costs and ongoing fees — when assessing which deal is most competitive.

Flexibility is a bonus. What are the financial consequences if you pay off your loan early?

Ask your bank if it will offer you a "relationship discount" for your car loan.

Have a loan approved before you go to the car dealer. It will give you power to negotiate a better price or extras on the car.

Car dealerships sometimes offer good deals on finance but check the details carefully against your pre-approved loan. Don't sign anything in haste. Ignore the hard sell.

If you roll your car loan into your mortgage to get the benefit of a low rate, make sure you pay it off within three to five years. If you repay the loan over 25 years, it will cost you double.

Bear in mind that a car is a lifestyle asset. It will depreciate in value over time.