How much should you spend?
What do you need to spend to get the car you need? We offer some ways to decide your budget.
Although it makes sense to have some flexibility built into your plans (to make sure you take advantage of a bargain) it’s a good idea to have a fixed upper and lower limit on your budget before you begin looking for a car. That will help you resist harmful temptation, and quickly narrow your choices down to a realistic shortlist.
Budgeting: overall price, or monthly payment?
There are two basic approaches to deciding your spending limit. The most obvious one is to have a maximum car price in mind; for example £12,000. If you’re paying cash, this is pretty easy, because you know how much money you have. It’s worth remembering, though, that even if you could afford to buy £12,000 car outright, a £20,000 car might be better value based on your needs and wants. Consider whether it’s worth taking out a loan for the difference.
Calculating your monthly limit
Most people do plan to borrow some money to help finance their car. In that case, the more meaningful measure is the monthly payment: for example, you may have a target of a £250 monthly payment. Exactly what you can buy with this will depend on interest rates, part exchange valuations, any cash deposit you have, the type of financing you choose, and how long you’re willing to spend repaying the money (we’d recommend making it no longer than you plan to keep the car, or four years at the most).
To figure out how much you can afford to afford to part with each month, do a quick calculation. List down your mortgage or rent payment, the amount you spend on groceries, utilities, insurance, council tax, other loans, pensions or savings and any other regular payments. Total up these and take the total away from your net monthly income. Then, take away your proposed monthly car payment. What’s left is your spending money: for clothes, emergencies, eating out, holidays, and so on: make sure there’s enough to cover these expenses.
Now, pause for a moment. It’s easy to be seduced by a shiny new car and spend all your 'treats' budget on it now, but ask yourself this, and give an honest answer. Will you still feel the same way about forgoing eating in restaurants, or weekends away two years from now, when that new car smell has long worn off and you’re still paying out? After all, you don’t want to get your car and then not be able to afford to drive it anywhere. Set your car budget at a reasonable level so that your car will be a pleasure and not millstone.
If that means you can't afford the car you wanted, there may be ways around it. How about a six-month old car instead of a new one? Or maybe you could take a PCP instead of a traditional loan, and get lower monthly payments (see our article Financing your car for more information).
How to bargain
Whether you've fixed a monthly budget and a deposit (which might be only your part exchange) or a cash spending limit, if you’re not sure what car you want, you can adopt a interesting approach to car shopping. Go to a number of car suppliers, and tell them upfront what you can afford to spend, and what your requirements are from your car (see the article Deciding Priorities for help with that). Tell them you're looking for a good deal and you don't care what the car is. Then, you can compare the packages that they come up with, and pick the one that appeals to you the most.
Don't forget the extras
Another factor to bring into play is running costs. Don’t forget that fuel, servicing, insurance and so on all need to be factored into your motoring budget – and generally, the more expensive a car is new, the more expensive it is to run. Don’t assume what these expenses are going to be – find out by getting quotes.
Finally, if you're borrowing money, think about contingencies. Suppose that you lost your income: how long would you be able to keep up your car payments: and thereby keep your car? (You can often take insurance against loss-of-income with your loan, but check the small print, because they rarely cover every circumstance, and there’s usually a delay of one or more months before it begins to pay out. Also, this will increase your monthly outgoings for a given price of car.)
So, however you're paying for it, deciding how much you can afford to spend on a car is a very personal decision. The trick is to make sure you get a car you’re happy with, but don’t end up regretting what you have to forgo in order to pay for it.