How much car finance can I afford?

Whether it’s safely saved in your bank account or stuffed under the mattress, the fact is that money matters.
 
That’s why ‘how much can I afford’ is one of the most frequently asked questions in the world of car finance.
 
It affects almost every aspect of buying a new set of wheels; your affordability will dictate what type of car you can buy, how much you’ll need to pay back each month (and overall), and whether you’ll have enough money left over to cover all the running costs.
 
Affordability is also an important part of the approval process. Responsible lenders must make sure that you can comfortably afford the loan they give you and won’t end up in financial difficulty. Getting a new set of wheels is a pretty great feeling (it makes our top 5), but not if it comes at the expense of everyday essentials.

Ready to find out more? Read on as we break down how your finances will affect your car finance:

Which factors affect car finance affordability?

In a nutshell, car finance affordability is all about how much disposable income you have available. The more spare cash you have, the more likely it is you’ll be able to afford your monthly repayments.
 
But there are a wide range of factors that can affect what that monthly repayment might look like including:

The amount you need to borrow

It probably won’t surprise anyone to learn that an £80,000 supercar will come with higher monthly repayments than a £10,000 used supermini. The cost of your car – and its rate of depreciation, which will affect its future value – is arguably the most important factor when it comes to making sure your payments are affordable.

Your credit score

Who would have thought that a three-digit number could make or break your affordability? Your credit score isn’t all-powerful, but it is the clearest information lenders have to understand how you’ve acted as a borrower in the past. The stronger your payment history, the lower the interest rate you’ll receive. It’s all connected: higher interest = more interest due = the more expensive your monthly payments will be.

Your loan term length

Car finance is designed to let you spread the cost of your new wheels over time. You might sign an agreement that lasts between one and six years. The more time you have, the thinner you can spread your repayments. While you might pay more in interest overall, a longer term can mean more affordable payments.

The size of your deposit

While a deposit isn’t always needed, if you can afford to put some money down upfront, you’ll reduce the amount you need to borrow.

The type of car finance you choose

You could secure higher or lower monthly repayments depending on the type of finance you choose and whether you’re working towards becoming your car’s legal owner. Stay tuned; we’ll dive into the details in the next section.

Which product is right for me?

Hire Purchase

Hire Purchase or HP for short is one of the most popular types of car finance, but it can also come with the highest monthly repayments. That’s because you need to borrow the car’s full purchase price (minus any deposit). The upside? Once all your repayments are made, the car will be officially all yours!

Personal Contract Purchase

If you’re looking for a loan like HP but with more options at the end of the agreement and lower monthly repayments, Personal Contract Purchase (PCP) could be a good pick. With this loan, you only need to borrow the amount of value the lender thinks your new pride and joy will lose over the loan term. You’ll need to pay the balance – the balloon payment – to become the car’s owner, but you could hand it back and walk away instead if you prefer.

Personal Loan

While personal loans can come with higher repayments and require a good credit score, they can be a good option if you don’t mind paying a premium for freedom and think your circumstances might change over time. That’s because personal loans aren’t typically secured against your new wheels, meaning you can sell, trade in, or modify the car at any time, as long as you keep making repayments.

Personal Contract Hire

One of the most cost-effective ways to have access to a car is through Personal Contract Hire (PCH) – more commonly known as leasing. While you won’t get to be the car’s legal owner (it’s more like a long-term rental) and restrictions on mileage will likely apply, once your lease ends, simply hand the car back and walk away. As you won’t be working towards becoming the car’s owner, monthly lease payments can be lower than other options.

Should I use a car finance calculator?

We don’t like to brag, but the Carmoola car finance calculator? It’s well worth your attention.  
 
It’s the perfect place to start when you want to find out how much your monthly repayments might be. It’s only an estimate, but once the calculator has worked its magic it can help you work out everything from how much you might need to budget to what your interest rate might be.
 
The calculator takes four factors into account: the amount you need to borrow, the interest rate, the agreement length, and the deposit. Play with any of these figures and you can quickly see how they’ll affect your overall picture.
 
What does doubling your deposit do to your payment amount? And would extending your loan term length make them more affordable? You’ve got questions – the calculator has answers.

How can I create a personal budget?

Every budget is personal and should have some wiggle room built in. The best budgets make managing your money simple so that you can confidently and comfortably afford all your costs, especially the essentials.
 
Start with your income after tax and any other automatic payments like your pension or student loan. The amount left over is your take-home pay – everything in your budget will have to add up to less than this figure to stop you from slipping into debt. 
 
Next up, calculate your essential expenses. This includes your mortgage or rent payment, your electricity, gas, water, Council Tax, internet, and more. These are fixed costs that you often can’t change (although you might be able to negotiate on your utilities).
 
When we budget, we choose to have a third category: the almost essentials. These are either things you need to live that you can spend varying amounts on (think your weekly food shop) or the costs that technically aren’t life and death but would make your life difficult if you couldn’t afford them. Your car finance might fall into this bucket.
 
Finally, it’s luxuries. These are the costs that you can include in your budget if you have room but can easily cut out if it comes to the crunch (even if that means cancelling Netflix before the final season of Stranger Things!)

How can I improve my affordability?

We promise that it is possible to improve your affordability without winning the lottery or uncovering a priceless heirloom in the attic (although we’re sure our stamp collection will be worth something eventually!)
 
Here are a few ideas to try while you’re waiting to strike gold:

Increase your income

It might be easier said than done, but increasing your income is a sure-fire way to improve your affordability. If you’re due a pay rise, it might be worth waiting until you get that salary bump before applying for finance. You may also want to take on a second job or a side hustle to earn more disposable income.

Choose a cheaper car

While you might have your set heart on a luxury model that’s just rolled off the factory floor, opting for a smaller or used car – or both – can reduce the amount you need to borrow. You might be surprised at how much you could save by simply choosing a car that’s two or three years old, rather than brand new (and who doesn’t love a bargain?)

Choose a longer agreement length

Loan terms often last between one and six years. A shorter loan term might mean paying less interest, but if you’re concerned about your affordability, choosing a longer term could make your monthly payments smaller and more manageable, even if you do end up paying more in interest overall.

Improve your credit score

One of the best things about credit scores is that they’re never fixed – you can take steps to improve your score at any time. It’s not an exact science, but keeping your total credit utilisation low, reducing the number of credit applications you have in a short time, making your payments on time, and registering on the electoral roll could all boost your credit and help you qualify for a lower APR.

What alternative financing options are there?

If you’re on a low income or have a limit on the number of hours you can work because you’re a full-time student or parent, there are alternative finance options that can still help you get behind the wheel.
 
Both joint and guarantor car loans can be solutions for people with low affordability:

Joint car finance

Sometimes it’s better not to go it alone. With a joint loan, you and another person will be jointly responsible for paying the monthly payment. That means both your incomes and credit scores will also be considered, so if you team up with someone with a good salary and credit score, it can help offset your circumstances. Be aware though that if the other person stops paying their share, you’ll still be responsible for the full payment each month.

Guarantor car finance

Guarantor loans are a bit like joint car finance but instead of you being equally responsible, the finance will be in your name only. So far, so standard; the big difference between this and other types of loan is that you’ll also appoint a guarantor: someone you trust who agrees to step in and make your payments if you can’t. Depending on the lender’s eligibility criteria, your guarantor might need to be over 21, a homeowner, and have good or excellent credit.