How Much Car Finance Can I Afford?

A car is probably the second most expensive thing you will own after a house, but with car financing, it's possible to make this purchase more budget-friendly. However, before signing any deal, you do need to think carefully about how much you can realistically afford to borrow. This is a common concern, this article will cover how much you can afford to spend on a monthly car loan with your salary. We’ll also be introducing our car finance affordability calculator UK to help you figure things out. Let’s get going!  👀

Apart from recurring car finance payments, there are other costs that you also need to consider, including repairs, maintenance, insurance, car tax and fuel. Factor these expenses into your budget when you're shopping for a new car. For example, your car insurance will be a significant annual sum, depending on your personal circumstances but also on the insurance group your dream car falls into - it's worth a check on that early on.

Your monthly salary or income is a critical element in deciding how much car finance you can afford in the UK

Check out Jade's handy video to help you better understand car finance affordability 👇

As a rule of thumb, you should only spend 10-15% of your net income on your monthly car payments. For the operational car expenses, it should not exceed more than 20% of your take-home salary. Once you decide what car you can afford based on your salary, you can calculate the total amount you need to borrow.

What Car Can I Afford on My Salary?

Spoiler alert: the only true way to avoid over-committing on car finance is to calculate what you can afford. Yeah, we know, it seems kind of boring, but nowadays, there are so many tools that can help, so you may end up finding it’s not actually that hard to get information to help you budget for your car loan. Calculating your car finance budget is an absolutely vital step that will save you money all the way down the line. And don't forget to factor in other commitments you might want to take on in the future, such as a mortgage, for example. Let’s talk about our best tips on car loan budgeting. 

First things first, though, make sure you’ve taken a look at our car finance budget calculator before you go through this article.  This will indicate, for example, what you could afford to borrow for car finance with £350 per month. So this will give you an idea of how much your monthly repayments will be based on the amount you want to borrow, the length of the term, etc. Calculating your car finance payments can be a tricky operation, so we’ve built a loan budget calculator to help you figure things out. That way, you’ll be able to input the amount you would like to borrow and play around with different options to get your ideal monthly car payments. 

How To Calculate Your Car Finance

While this 10 -15% method might not work for all buyers, it’s a baseline for you to make a calculation. Depending on whether you are going for a new or used car, this amount may differ. Figuring out exactly how much your car finance payments will be is actually quite tricky. That’s because it is dependent on many different factors, such as interest rates, for example.  With car finance, interest is usually calculated on a flat annual rate, but the exact rate you’ll get will also greatly depend on your own personal circumstances and affordability. You’ll also find that if you have a good credit score, you’ll have access to great interest rates, regardless of your salary. 

Your monthly payments will depend on the term of your loan, i.e. how long you borrow the money. If you pay your loan back within a few months, you’ll have lower interest rates than if you were to pay it back within a few years. Bear in mind that the most common car loan terms are 12, 24, 36, 48, and 60 months. Some lenders will even let you borrow money for 84 months but at a much higher interest rate. It’s also important to consider if you really want to commit to such a long-term loan before signing your car finance contract. We have a detailed article about loan terms if you want to learn more! 

Now, let’s take a look at how you can customise your own budget. 

Have A Customised Budget

Set your car finance budget according to what you can afford to pay each month. Have a breakdown of all your daily expenses. From your take-home salary, deduct expenses such as groceries, mortgage or rent, council tax, and utility bills to determine how much money is left. With this budget, you can decide which type of car you need, whether used or new. Also, it clearly shows how much you can afford to spend on running costs. If your net salary is £3,000, you can afford to make £300 payments each month. It's best to be realistic about the budget so it's not too strenuous to keep up with the monthly repayments. 

Calculate The Car Loan

For this calculation, you first need to know the payment you can afford to borrow from the lender. The amount will also depend on your credit score, loan term, and whether the car is new or used. All these factors determine your loan's annual percentage rate (APR). As you make these projections, you then have to take into account the trade-in value of your old car, if you have one, and the down payment or deposit. If you are buying a £10,000 car and plan to make a £2,000 deposit, your loan amount will be £8,000. An online auto loan calculator will assist you in making these estimations.

Determine The Car Running Costs

Purchasing a vehicle with car finance is a straightforward process. However, most buyers forget that maintaining a car is an expensive process. The vehicle will need road tax, insurance, fuel, repairs and servicing, registration fees if new, and not forgetting parking, of course! Most of these fees vary depending on your location, the type of car you are driving, and car use. Having a complete understanding of the car's needs, such as the fuel consumption and road tax band, allows you to determine how much car finance you can afford.

You can get insurance cost estimates from your agents or insurance companies for easier budgeting. You'll need to prepare the registration number, the mileage, and if the car has been modified in any way. Insurance companies also need to know how much mileage you expect to do each year. Choose how much voluntary excess you are prepared to pay and the type of insurance coverage you require. As you calculate these figures, you should also factor in depreciation costs to decide whether you will go for a new or used car. New cars are affected more by depreciation as compared to used cars, so plan accordingly.

Have A Target Purchase Price

Once you determine the car finance you can afford,  set a target purchase price based on your salary and other calculations mentioned above. This total amount should include extra costs such as sales tax, registration and documentation fees. With this set purchase price, you can now approach a dealer and start the buying process. And you can then go on to negotiate for auto models that are within your budget and price range.

Analyse your Buying Patterns

Different buyers have different needs. As you calculate your car affordability, also determine why you need the car, what you will use it for,  and how long you plan to keep it. If you plan to buy a vehicle and keep it long-term as you repay the loan, then a new car might be most suited for you. However, if you like to change your cars often and upgrade to the latest models, it might be better to go for a car leasing option. Think of these factors so you can have an easier time calculating the type of car finance deal you can afford. 

How to Budget Realistically for Car Finance

Financial experts will advise you not to spend more than 10% of your income after tax to pay off your monthly car finance payments. That means that if you earn £2000 monthly, you can’t afford to spend more than £200 on your repayments. That may seem like bad news, but there are actually plenty of cars you can buy on finance at affordable monthly repayment amounts or as low as £200 per month. 

It important to emphasise that if you’re not brutally realistic with these projections, you might end up not being able to afford your car finance repayments after a while. This is something you should definitely avoid. Missing payments on your car loan could be catastrophic to your credit score and also affect your ability to take out all sorts of loans in the future.

If you want to be sure of your decision, you can use our handy car finance affordability calculator - it’s free and easy! Scroll down the article to see how to calculate your disposable income - and don't forget to budget for all the extra costs having a car involves - such as road tax, insurance, fuel, servicing and maintenance.

Have Spare Cash? Use It to Lower Your Monthly Payments!

There’s only so much you can do to make sure you keep your monthly car payments low. It’s not always a good idea to go for the longest car loan term possible, and depending on your personal circumstances, you may not be able to get the best interest rates out there. However, one trick that always works like magic is to use part of your savings as a downpayment. You see, the higher the deposit you put down on your financed car, the lower your monthly loan amount will be. You could effectively end up borrowing much less money if you use your spare cash as a deposit. But see to it that you keep some of your savings in case of emergencies and other unexpected car-related expenses. 

Balancing Your Car Finance Budget  

Remember that your car finance repayments are not the only obligations you have to take care of. As we've said, there are other car-related expenses that you need to prepare for, such as repairs, maintenance, insurance, road tax, parking, and also tolls. It's quite a list! And you still need to cover your regular outgoings plus some spare for emergencies or even little treats like holidays, meals out etc. 

If you're still not sure, you can use the 50-30-20 rule when it comes to budgeting your take-home pay. The three categories are your needs, wants, and savings. Set aside 50% for your needs, like your food, housing, and transportation. Your car-related expenses belong in this category. For your wants, you can set aside 30% for that. It can include non-essential items, travel, entertainment, and others. And finally, keep 20% of your pay for your savings so you can meet your other financial goals. 

Finding Affordable Car Finance Deals? 

If you want to get affordable car finance UK you need to do some research and compare the deals available. It might take a bit of work to shop around for affordable car finance deals, but it will definitely be worth your while. You’ll be able to save a lot of money by going for a good deal - don’t settle for the first lender you come across. Instead, go ahead and check what other car finance companies can offer you. Compare like for like with each company, and maybe get a decision in principle first, as this won't involve a hard credit search. It's a bad idea to apply for numerous car finance deals at once, as lenders conduct hard credit searches when evaluating your application. Choose the best car finance company for you and go for it!

Using a Car Affordability Calculator

The car affordability calculator helps you to calculate what's right for your budget without any complicated manual calculations. You would need to input how much you want to borrow, the loan term or the number of months it will take for you to repay the loan, and whether you need a new or used car. This calculation gives you the estimated APR and repayment amount. If you are using an online tool, you can adjust different inputs until you get a loan within your means.

Choosing the Best Car for Your Budget

Car finance payments should take up about 10-15% of your take-home salary. However, this differs if you are going for a vehicle that is more functional and luxurious. In this case, you may need to spend more than 20% of your net income. And this will also depend on the level of your other commitments. If your average salary in the UK is £25,000 per year, at 25% of your total income, you can afford to spend £6,250 on a new car. This amount can buy you a car such as the Suzuki Alto.

It’s best to go for a loan budget that you can afford comfortably. Do be careful because it’s very easy to overspend when purchasing a car. Try not to get carried away!  The only way to avoid this is to plan early by calculating how much car finance you can afford based on your salary before approaching the dealership, then stick to the amount you can comfortably afford. If you need to keep your monthly payments as low as possible, you might want to consider a PCP or car lease instead.

Before committing to a specific loan amount, make sure it does not strain your regular monthly expenditure. Also, remember there are more costs involved after buying the vehicle, so be sure to take those into account. If you do find you have overstretched yourself a little and need to lower your car loan payments, there are still a few options, such as refinancing or extending your loan. Better to look into this rather than default on your payments! 

Get Car Finance with Carmoola

Carmoola makes car finance simple and efficient for car buyers who want to purchase their dream car. If you've decided you'd like to try and get finance on your next car, the next step is to download Carmoola. The app is simple to use - you only need to enter your details and verify your identity. We will process your application instantly and determine if we can help you with car finance. If you qualify for car financing with us, you can choose the car you want from any reputable dealership or online car marketplace in the UK.👍