How much can I afford for a car?
Do you know how to budget to buy a used car? Find out how to calculate the cost of buying and keeping your vehicle on the road.
How much can I afford for a car?
We all know someone who drives a car that doesn’t match the rest of their life. Working for minimum wage at the check-outs in Tesco and driving an Audi A3? Hmm. That won’t end well.
Buying a car that’s going to be a big burden on your income is a terrible decision. You must take an honest look at what you can comfortably afford.
We know – you can’t wait to get behind the steering wheel, especially if it’s your first ever car. However, don’t rush into it: make sure you find the right vehicle and payment option for you.
We’re going to run you through everything you should consider when asking yourself how much can I afford for a car.
How will you pay for the car?
So you’ve found the one – the car you want. It looks like it’s cheap to run, and is in excellent condition.
Now it’s time to think about actually paying for the car. You have two options – buy it outright, or finance.
- 1. What percentage of your budget should you spend on a car?
- 2. Buying outright
- 3. PCP
- 4. HP
- 5. How much will I pay in interest?
Infographic – How much can I afford for a car?
1. What percentage of your budget should you spend on a car?
Heading out into the big bad world, you need to have a sensible budget. Looking at how much you’re earning, and how much you’re spending – if you’re spending more than you receive, you need a new budget!
When buying a car, it must fit into your budget. One sensible rule of thumb is to spend no more than 15-20% of your wage on your vehicle. That means car payment, insurance, fuel – the lot!
Now that might be a little bit harder if you’re a young person, with astronomical insurance costs. In general, though, you want to aim for around this 15-20% mark.
So for example, Jenny, an average living wage worker, will make around £8.20 an hour, or about £1300 a month after tax. That leaves around £260 per month for car costs.
Her car payment is £108 per month, she spends £50 in fuel a month, and her insurance is £90 per month. Thankfully, she bought a sensible car that doesn’t cost anything in road tax! The maximum fee for an MOT test is £54.85, but Jenny manages to find a reliable garage doing an MOT for £45. The garage also does a full service for £100. To cover these annual costs, Jenny puts £12 away a month.
This brings her total monthly motoring costs to £260 – bang on the 20% limit No problem!
Her brother, James, however, isn’t so smart.
He’s only 18, so makes the minimum wage of £6.45. With a 40 hour work week, he makes £1032 a month, after-tax. That gives him a maximum of £206.40 on his car.
However, he opted for a sporty VW Golf with a monthly payment of £150 for the car alone. He drives like a nonce, so spends £70 in fuel per month. And because the car is powerful, his insurance is a whopping £120 a month, plus road tax of £10 per month! He uses the same garage as Jenny, so spends £45 per year on his MOT test, and £100 per year on a full service – this works out to an extra £12 per month.
He’s paying a whopping £362 a month just for his car. That’s over one-third of his income – and isn’t sustainable!
The number of used cars sold in the UK during 2019 – 7,935,105.
Source: SMMT, 2020
2. Buying outright
Buying with cash is often seen as the best way to buy a car. You’re only paying what you can afford, and you won’t pay any extra costs on interest. Plus, you own the vehicle from the beginning.
However, spending thousands of pounds upfront can be a bit nerve-wracking and isn’t always the best move.
For instance, say you’re looking at buying a car for £5000 – the entirety of your savings. You buy the car, and three months later, you lose your job. You have no emergency savings to fall back on.
Instead, imagine you financed the car with a decent interest rate. You’d be paying around £100 a month, but your savings are intact. You’d be able to use your savings to keep you afloat until you find another job.
If possible, you should always have an emergency fund – a couple of months wages. If you don’t have this, it might be better to put a larger deposit down on a car finance deal and keep the remainder for your emergency fund.
However, this assumes that you’ve financed a sensibly priced car. If you’ve taken a PCP out on a £250 per month BMW, then you will be in trouble if you lose your job! Always be realistic about what you can afford, and don’t get ahead of yourself.
Overall though, if you’re doing well financially, have a bit of back up savings (or, ahem, lovely parents) then buying a car outright will cost you the least amount of money over the long-term.
Personal Contract Purchase is where you pay off the value of the car over a set period, excluding depreciation. The outstanding amount of the vehicle is then paid off at the end of the contract, in a balloon payment typically thousands of pounds, and many choose to hand the car back instead.
PCP is one of the cheapest ways to finance a car, but it’s not without its downsides. For one, you have a mileage limit. If you change jobs and have a much longer commute to work, then you may face excess mileage charges.
Secondly, you never actually own the car – unless you pay the final payment. Meaning any ding or dents on the vehicle that wouldn’t bother you will annoy your dealer! You could face damage charges for the condition of the car.
Finally, as with most finance options, you’ll be paying interest on the car!
Hire Purchase, known as HP, is where you pay the car off over a contract term. Unlike PCP, you have no mileage limit and no final payment. You make equal payments over the contract term. So if you buy a car at £5000 and pay over 48 months, you’ll pay £104 plus interest.
The advantage of HP is that you can sell the car on when you’ve finished your contract. While the car will likely depreciate quite a bit, you should at least be able to make some money back.
5. How much will I pay in interest?
For a young driver with a poor credit history, you’d be lucky to get an interest rate of less than 9%. Meaning a £5000 car, on a 48-month Hire Purchase deal, you’d pay:
£5,972.64 in total cost.
£124 per month.
£972.64 in interest.
So if you have the cash to buy a car outright, you’ll be able to save yourself £1000 over four years. Is it worth parting with that money upfront though? It depends on your circumstances. Do you have a secure job? Back-up savings? If so, definitely buy a car outright.
Infographic showing the costs associated with running a car
Factor in the Costs
Before you look at examining your budget, you really ought to be aware of all of the costs involved in running a car. Unfortunately, it’s not as simple as buying a car and sticking some petrol in it. Factor in:
- 1. Insurance
- 2. Fuel
- 3. Road tax
- 4. MOT costs
- 5. Breakdown cover
- 6. Maintenance
For young drivers, car insurance costs will likely be your most significant expense, after buying the car itself. Prices for 18-24-year-olds are often astronomical, sometimes costing thousands of pounds per year. While you can’t change your age, there are a few things you can do to get the lowest insurance price possible.
Insurance costs are based on insurance groups, and every car has a group number. The groups go from 0-50, with 50 being the most expensive.
The more the value and power of the car, the higher the insurance group. Your mums old Toyota Aygo hairdryer will be in groups 0-5. Your mate from Tesco’s Audi A3? 18-20. Which group the car is in can be a difference of hundreds, if not thousands of pounds, a year.
Before looking to buy a car, be sure to look up the vehicles insurance group. You can use a site like Car Insurance Groups to do so.
How much you’ll spend on fuel should be one of your first considerations when looking at a car. Opt for a ‘thirsty’ car, and you could spend most of your wage just getting around!
To get a rough estimate of a cars fuel costs, follow these quick steps:
- 1. Find out the MPG of the car on HonestJohn. Manufacturers ‘official’ MPGs are often inaccurate.
- 2. Work out how much you drive in a month. Say you drive 20 miles to work and back each day, five days a week – that’s 100 miles a week and 400 a month.
- 3. Use a fuel cost calculator to find out what you’d spend. Enter in your cars MPG and monthly mileage. With an mpg of 40, that’s around £50.51 per month. Opt for a less efficient car, with 30 mpg, and that cost will go up to just under £70 per month. Remember, fuel prices vary daily, so this can go up and down.
When buying a car, it must fit into your budget. One sensible rule of thumb is to spend no more than 15-20% of your wage on your vehicle.
3. Road Tax
It’s a legal requirement to pay the road tax for your car. Road tax contributes towards maintaining roads. Most cars these days are relatively low in road tax, but it’s still essential you factor in the cost.
Use Parkers to find out how much tax you’d pay on the car you’re interested in. Your road tax depends on the CO2 emissions of your vehicle, so smaller-engined (newer) cars will have a road tax of £30, or sometimes even £0. Bigger engine and older inefficient cars could cost you £120 a year.
As a young driver, you’ll likely want a petrol car, as diesel cars cost a fortune in road-tax. Thankfully, newer petrol engines are reasonably clean – so shouldn’t cost you too much in road tax.
You can pay your road tax outright for six months, the year, or pay it in 12 monthly instalments.
4. MOT costs
An MOT is a health check of your vehicle that makes sure it’s safe to be on the road – for you and others. You’ll need to have this completed once a year.
The government has a maximum MOT fee of £54.85, but you’ll likely find it cheaper in many local garages.
Do your research on the garage – check TrustPilot, Google Reviews, and Facebook reviews. It’s essential to find a trusted mechanic who won’t mess you around with MOT results. A good tactic can be to go to a local council MOT centre, who don’t do repairs. So no motivation to deceive you!
If your car fails your MOT, you’ll need to repair the issues before you can legally take it back onto the road. It’s a good idea to stick ten or twenty quid aside each month, in anticipation of any MOT repairs.
5. Breakdown Cover
There’s nothing scarier than your car breaking down in a dark country road. You pull over and sit in the car and call your breakdown cover. What if you didn’t have breakdown cover? Eek!
Don’t find yourself in that position! Breakdown cover is relatively cheap in the UK and is essential for all drivers.
You can’t go wrong with the big names, like AA and the RAC. Use a comparison site, like MoneySavingExpert, to find out the cheapest rates going. You’re talking around £10-15 a month for the top level of cover.
If you opt not to get breakdown cover and need to phone a tow-truck to come and get you, plus a taxi to drive you home, you’ve already spent at least double your yearly breakdown cover cost. Not worth it!
While your MOT will probably pick up most maintenance issues, it can be a good idea to take your car for regular services. In your car’s handbook, you should have a service history, with details on when your vehicle needs servicing (usually every 12,000 miles or once a year).
You can opt to have a service done around the same time as your MOT, or whenever you like. If you’re keen on making the car last as long as possible, consider part-services usually done every six months. For a service, you’re talking around £100-125, and half that for an interim service.
By taking your car for regular services, you significantly increase the resale value of it, if you decide to sell it on in a few years.
There’s a lot of information here, so here’s a quick recap on the top points:
- Make sure you buy a car that’s sensible and affordable. Look for a good MPG, low road-tax, and low-insurance groups.
- Buy outright if you have the funds. If you finance, only opt for what you can afford, and remember to factor in interest rates.
- Spend no more than 15-20% of your wages on your car.