How Much Can You Afford to Spend On A Car?

£8,000
48 Months

£356.94

48 monthly repayments

Best available rate 6.9%

Total cost of credit £1,069.12

Total repayment £8,569.12

Illustration of a customer with a car dealer

Representative example:
Borrowing £6,500 over 48 months with a representative APR of 21.4%, an annual interest rate of 21.4% (Fixed) and a deposit of £0.00, the amount payable would be £196.24 per month, with a total cost of credit of £2,919.52 and a total amount payable of £9,419.52.

Few of us have the cash saved to buy our next car outright. We all have bills and expenses to think about, and this constant drain on our finances rarely allows us to squirrel away the full cost of a car.

But that doesn’t mean you can’t get the car you want with the budget you have.

Far from it.

With a little thought and a canny plan, you can afford more car than you ever thought possible.

This is where we tell you how.

Let’s get this out of the way first: this is an article about budgeting and budgeting can be dull. Don’t let that put you off. If it puts you behind the wheel of the car you want it’ll be more than worth the effort.

Your Initial Budget

Most of us have a number in mind for how much we’re willing to spend on a car. What’s yours? This will change based on the type of car you’re looking at - you know that a sports car will cost you more than a small hatch.

Write this number down. Go ahead, put it down on paper and let’s see if that number is the same at the end as it is at the start.

Alternatively, look at the amount you think you can spare every month or every year, as a percentage of your income. What does that number look like? 10%? 15%?

Write this down too.

Now that we’ve got that number, let’s try and break a few things down.

Illustration of a man leaning against a giant jar of coins
A couple doing paperwork with a car dealer

Deposit

Unless you’ve got all the money to hand at once, or you’re buying cash-in-hand, you’re going to need to pay a deposit. Most Finance options require one and they can make a surprising difference.

If you pay a larger deposit, the overall amount you will end up spending on a car on finance will be lower. Your monthly payments on that car will also be lower.

The bigger your deposit, the better.

Handily, most car dealerships will have a calculator that works out how much of a difference a different deposit makes. They might have one online. If they do, tinker away to your heart’s content as you’re searching for the car you want. Search multiple dealerships and multiple sources to see what difference it makes to their cars.

If there isn’t an online configurator, ask the salesperson in the dealership to go through different calculations there and then. And don’t say yes to any deal straight away.

If a larger deposit equals lower monthly payments you’ll be giving yourself more leeway in future if your finances hit a rocky patch. If you don’t have the money for a big deposit, consider waiting a few months to buy and saving that money up. Trust us, it makes all the difference.

Give yourself an idea of the most you are willing and able to spend on a deposit for the type of car you want.

Row of 5 cars

Monthly Payments Vs. Total Cost

Here’s where we get to an interesting balancing act.

If you go for a longer finance period, your monthly payments tend to be lower. “Great!” you might think.

But hold on.

While monthly costs may be lower, you’re going to spend longer paying for the APR on that loan, and those extra chunks of interest and fees add up and can mean you’re paying £thousands more over the length of your Car Finance.

Look at the first number you wrote down, again. If you take out a longer finance deal, you might end up blowing through that budget long before you finish paying for your car. What else could you spend that money on?

So, using online and dealership calculators, try and balance your monthly payments with the total cost of any loan. A larger deposit will impact this calculation too so tinker, tinker, tinker.

The Total Cost of Ownership.

Now that you’ve an idea of how much finance might cost for the kind of car you want, it’s time to look at what’s called the Total Cost Of Ownership, or TCO.

Y’see, the Car Finance Payment isn’t the only expense you really need to consider. You need to factor in:

  • Fuel
  • Maintenance
  • Tax
  • Insurance
  • Depreciation

Each of these is a cost. Each of these should be coming from the budget you set at the very start.

Illustration of a set of scales with money on one side and a car on the other
Fuel pump icon

First up: Fuel.

What mileage do you do most months? If you have a regular commute, what is it? Again, calculate this and write it down.

Now you need to do a bit of research on the types and models of car you’re looking to buy. This isn’t hard: such things are readily available online. Don’t take the manufacturer’s word for it, either. Check out real-world reviews and calculators to get the best idea of how much fuel you’re likely to use. Now, remove that from your budget.

There are cars that will cost you virtually nothing to fuel - like plug in hybrids or fully electric cars. Factor this in. Had you considered one before? On an EV electricity tariff, you could “fuel” one at as little as 1p a mile, which would put a significant dent in the TCO, even accounting for the higher up-front price (we’ll come back to this).

Fuel Pump Icon

Maintenance

Maintenance will vary depending on the car, manufacturer and type of car. The rarer or more luxurious it is, the more repairs will cost. Tonnes of them around? You’re going to pay less if something goes wrong.

Modern electric cars tend to be more reliable than petrol or diesels, too, as there are fewer moving parts to wear out. Don’t worry about the batteries: studies show that battery degradation is nothing like the problem that was initially feared, and most EV batteries will outlive the car they’re placed in.

Look at the tax and insurance for different models. Again, this is all available online. Write this down too, take it off your overall or monthly budget.

Piston and Spanner Icon

Maintenance

Maintenance will vary depending on the car, manufacturer and type of car. The rarer or more luxurious it is, the more repairs will cost. Tonnes of them around? You’re going to pay less if something goes wrong.

Modern electric cars tend to be more reliable than petrol or diesels, too, as there are fewer moving parts to wear out. Don’t worry about the batteries: studies show that battery degradation is nothing like the problem that was initially feared, and most EV batteries will outlive the car they’re placed in.

Shield Icon

Tax & Insurance

Look at the tax and insurance for different models. Again, this is all available online. Write this down too, take it off your overall or monthly budget.

Car Forecourt Icon

Depreciation

This is the biggie: It’s the second biggest cost of owning any car - and yet it’s one most of us ignore.

Don’t.

At some point, you’ll want to sell your car. It’s almost certainly going to be worth less when you do so than when you bought it. The difference is also a cost to you, not least because you’ll want to use this cash on your next deposit.

Again, there’s plenty of information online about the depreciation on most makes and models of car. Research this - it might be worth choosing a car you hadn’t considered if that model tends to depreciate less than the one you had your eye on.

There is good news on the second hand front, however: second hand cars have already spent most of their depreciation. If you’re buying used then you could get a bargain that you might not have expected to afford new.

Cars have life cycles that are measured in years. Updates are not quick. So if you buy a car that’s a couple of years old, it might have all (or most) of the mod cons of a brand new model,.. But for less.

What does that do to your budget?

How Car Finance Options Make A Difference

Here’s a question you might not have considered: do you want to own your car?

Most of us would say yes but it’s not always the best option.

With PCP Car Finance and Lease deals, you might not end up with the same car on your driveway in 3 years. You might not end up owning the car at all.

The secret here is this: you’re not paying for the full cost of the car. You’re only paying for its depreciation.

What does this mean? The car costs you less every month.

The even bigger secret is this: cars that depreciate less, like Electric cars, get cheaper this way. Headline figures for the cost of an Electric Car can seem out of reach but leasing an EV might not actually be much more expensive than paying for a regular combustion-powered one every month. And you’ll be saying on fuel.

With a PCP deal, you still get the option to buy the car outright at the end of the finance period but you’ll have to factor in the final payment - known as the “Balloon” payment - into your plans. The dealership or lender will tell you what this is going to be in advance.

Illustration of a car on a clipboard next to a calculator and a man holding a giant pencil

So how much CAN you afford to spend on your next car? As you can see, there are a LOT of variables. Now that you know what they are, however, you’re in a better position to match your budget with the type or model of car you want.

Maybe working out the budget you can afford and adding up the costs on a certain type of car will make you reconsider that car. Maybe there’s a different model that fits the bill AND your budget.

It’s really up to you.