Whatever reason you’re buying a car, choosing the right one for you is a big decision. It’s got to suit you and the needs you have for a car. It’s got to be affordable not only to buy or obtain but also to keep on the road.
But how do you budget for a car? What expenses do you need to think about now and in the future?
More than anything else, how much you can afford is going to determine the actual car you end up with.
When most people get a new car, they make two payments – a down payment followed by a fixed amount every month. Sometimes, you’ll have to hand that car back at the end of the period you agreed to take the car on, paying an “excess” if you’ve gone over the mileage limits set out in your finance contract. Other times, you’ll be able to make one final lump sum payment so that you actually take ownership of the car. We’ll look at the types of finance available later in this article.
Other people, particularly when buying a used car, will pay outright in one lump sum for their new car.
Once you have your car, there are other payments to think about fitting into your budget – tax, insurance, servicing and maintenance, and insurance being the main ones.
What is the right car for you? Your decision will be swayed by a number of different things – what you’re going to use it for, how much you’re going to drive it, the visual appearance of the car, whether it’s automatic or manual, even whether it needs to be able to tow a caravan or not.
You are probably going to be driving your car for at least the next three years so it’s important to get a checklist together about what your car must have and then whittle down the options from there.
Ideally, it’s best to pay for your car using cash whilst making sure that you keep enough in reserve in your bank account to cope for emergencies. Opinions vary but most financial experts recommend that you have at least three months’ wages spare just in case of an unexpected expense or an interruption to your income.
If that’s not possible, try to put down as much cash as you can and consider using finance for the rest. The bigger your down payment, the lower your repayments will be and the less interest you’ll pay to your finance company for access to the money.
All purchases over £100 which are paid on credit card are protected by the Consumer Credit Act. That means if something goes wrong, you are entitled to claim the money back from your card provider. Please make sure that, if you can, you pay the balance off in full the next time you receive your bill to either minimise the interest you pay or pay no interest at all.
Normally only available if you have a good credit rating, personal unsecured loans can be the second cheapest alternative behind paying in cash. There are plenty of companies offering unsecured personal loans, so you’ll be able to shop around for the lowest interest rates.
Because the loan is unsecured, you may be required to take out the loan over a shorter period of time meaning higher monthly repayments. This could put a squeeze on your general monthly budget so please be careful just what you commit to.
You own the car straight away and it cannot be repossessed (normally) if you do not keep up your repayments.
With hire purchase, you will normally pay a 10% deposit on the car followed by monthly repayments stretching over one to five years but beware – hire purchase can be very expensive over shorter terms.
The payments and interest rates are fixed over the course of your agreement. You don’t own the car until the final payment is made meaning that, if you default, they will repossess the car from you.
This is like hire purchase but the repayments you make are lower although the total amount of money you’ll spend on the car will normally be higher during the time you’re driving it. As you know, cars lose their value quickly once they’re driven off the forecourt. Let’s say you take a personal contract purchase on a car worth £30,000 and, at the end of the three years of the contract, the car is worth £18,000. It’s the difference between those two amounts you’ll be paying back plus the interest.
At the end of the contract period, you can trade it in back to the dealer and take out a new personal contract purchase. Alternatively, you can give the car back and pay nothing or pay a balloon payment on the value of the car (using the above example, that would be £18,000).
As with hire purchase, the deposit is 10% and the typical contract lengths are between 12 and 48 months. You agree to a maximum number of miles you can drive over the contract length and you’ll pay extra if you go over that amount. You’ll also pay more if there is wear and tear on the car that the dealer considers to be more than there should be for the length of time you’ve driven it.
With personal contract hire, you pay the dealer a set amount every month for using the car. The price you pay includes servicing and maintenance. Like with personal contract purchase, you are allowed a maximum mileage over the term you have the car or you’ll pay an excess.
You never own the car – you hand it back at the end of the term. You’ll have to put down a deposit of 3 months’ repayment to take out a personal contract hire plan.
On the plus side, you don’t have to worry about the car falling in value, you never pay for maintenance and servicing, and you can hire the car for periods of between twelve and thirty-six months. On the negative side, your monthly cost will be higher and you will never take possession of the vehicle.
Whichever option you choose, make sure that the monthly repayment sits comfortably within your budget and that you won’t be putting your finances under pressure.
You’ll also have to factor paying road tax into your monthly budget plan. Although DVLA accept annual payments, you can make monthly payments and pay no premium for doing so.
The amount of road tax you pay depends on the car you drive. The most environmentally-friendly cars attract no road tax with the most polluting cars attracting a charge of £2,070 a year.
Another cost to consider is how much you’ll pay for fuel each year. How much you pay depends on how fuel efficient your car is, the number of miles you drive, and whether your car runs on diesel or petrol. (Electric cars are becoming more widely available and are the most economical to run in most cases as electricity used to power a car does not attract fuel tax).
According to CarBuyer, the average driver travels 8,000 miles a year at a cost of £1,050 in petrol. You can drive more economically by using diesel although CarBuyer estimate that you’ll need to cover around 12,000 miles or more for the decision to make financial sense.
All cars need a yearly service, even new one. After three years, your car will need to go in for an MOT inspection every year. You should factor in a couple of hundred pounds for a full service although this price can rise greatly if you’re running an expensive car.
Main dealers are generally more expensive than independent garages but it’s always worth taking a quote to a main dealer to see if they’ll match the price.
The more you service your car during the time you own it, the slower it will fall in value when it comes time to sell the car or to trade it in for a new car (more on depreciation below).
How much you pay for your car insurance will vary greatly depending on a number of factors including the value of the car you have, the length of your no-claims bonus, whether you have points on your licence, and your age.
There are plenty of comparison sites available where you can receive an indicative quote on the amount you’ll pay in insurance. Most insurers offer an option to spread the cost over 12 months but many of them charge you up to 10% interest for doing so.
Depreciation is a cost that you don’t feel until the time it comes to sell your car. Unlike houses which generally rise in value over time, the price of nearly all cars fall, particularly in the first 2-3 years after the car was manufactured.
Certain makes and models lose value faster than others so it’s worth doing research into depreciation if you intend to trade your car in after a set period of time and use it as a deposit for a newer car.
Wherever you drive your car, either for work or for pleasure, what are the parking charges you’re likely to face on a monthly basis? Make sure to include these costs to see if they fit within your budget.
Currently only in London, you have to pay to drive your car into certain parts of the city. These costs can also add up very quickly. Would it be cheaper to take public transport to work than drive your car into London and pay both the congestion charge and parking charges?
There are four parts to this –
If the monthly costs are affordable and won’t leave you struggling in other areas, then your choice of car is good financially for you. Remember though that, once a year, you’ll need a service or an MOT performing on your car and that you should start putting a little bit aside each month a few months beforehand to pay for it.