How much car finance can you afford? A simple way to work it out

Not sure if your budget can cover car finance? Figure out what you can afford with our simple 4-step calculation.



So, you've decided to get a car on finance – good shout. But before you do, you need to figure out your budget.

There's a simple reason for this. If you fall behind on your monthly payments, you may face late fees, damage to your credit score or even a repossessed vehicle.

Many people, however, build their budget around one thing: the price of the car. However, there's a problem with this approach. It doesn't take into account how much you can really afford month by month, let alone hidden costs you might incur.

A simple rule of thumb is to figure out a monthly payment you can comfortably afford and work backwards from there.

Once you have a clear budget, you're better placed to enjoy your vehicle without fear of negative consequences. It's a calculation well worth making.

Our four-step method

Figuring out your car finance budget isn't rocket science, but it does take a bit of maths. Here's how to do it in four steps.

1. Write down your monthly take-home pay

In other words, the money you actually receive each month after tax and other deductions.

2. Subtract your regular monthly spending

Start with essentials such as your rent or mortgage, household bills, food, insurance, regular savings and existing debts.

But don't budget as though you'll never spend money on anything else. Allow a realistic amount for things like clothes, subscriptions, meals out, hobbies and other everyday spending.

3. Subtract the costs of running your car

Your monthly finance payment isn't the only cost of having a car. Allow for things like insurance, fuel, vehicle tax, servicing, maintenance and MOTs where applicable.

4. Leave yourself a buffer

Don't commit every remaining pound to your car finance payment. Unexpected expenses crop up, and your costs can change over the course of a finance agreement.

There's no single buffer that's right for everyone, but you could aim to leave at least 10% of your monthly take-home pay uncommitted as a starting point. Consider leaving more if your income or expenses tend to fluctuate.

What's left gives you a much more useful indication of the monthly car finance payment that could fit within your budget.

What are the likely costs?

You may come across rules of thumb suggesting that your monthly car finance repayments should be around 10% to 15% of your take-home pay. So, if you take home £2,000 a month, that would mean a finance payment of around £200 to £300.

But percentages like these are only a rough guide. Someone with low housing costs and few financial commitments may comfortably have more room in their budget. Someone earning the same amount but spending more on expenses could have much less.

That's why it's better to start with your own income and spending, using the four-step method above to work out what fits comfortably within your budget.

And remember: your finance payment is only part of the cost of having a car. You'll also need to budget for fuel, insurance, vehicle tax, servicing, MOTs, maintenance and repairs.

These costs can vary considerably depending on you, the car you choose and how much you drive.

It's a good idea to account for these costs, your everyday spending and a sensible financial buffer. That way, you'll have a much better idea of what you can comfortably put towards car finance each month.

Important numbers other than monthly repayments

You may look at a car finance monthly payment and be sure it's within your budget. However, there are other important costs to consider.

There are running costs: tax, fuel, servicing, tyres, MOTs and repairs. None of these is included in your monthly repayments.

Then there's insurance. Car finance agreements sometimes include this, but you can't take it for granted. Moreover, premiums vary depending on the insurance group of the car you choose.

Finally, there's the potential for penalties. You might be charged for excess mileage or wear and tear.

You must factor in all these costs as a buffer. Otherwise, your budget may have to stretch further than you imagined.

This brings us to another consideration: hidden costs that you may incur.

Hidden costs

A reputable car finance broker will be upfront about the costs they require. Nevertheless, some costs may not be immediately obvious.

Interest and fees

If a car is leased at £300 a month, £300 isn't the total cost. There are also interest and fees, which are typically given as one handy figure called "annual percentage rate" (APR). Make sure you know the representative APR and the total payable amount.

The deposit

If you're putting down a large deposit, you may feel that you've bagged a deal when looking at the monthly repayments. You should remember, however, that the deposit is still part of the car's cost.

Optional extras

You may be offered optional extras. Some of these could be worth having. But before you agree to paint protection, a warranty, optional GAP insurance or an extra servicing package, make sure you can afford them.

Penalties

Your contract will probably include charges for excess mileage or wear and tear. If you exceed your agreed mileage, you'll probably face a per-mile charge when you return the car. And if the car doesn't meet wear-and-tear standards, you'll be charged too.

The balloon payment

If you take out a personal contract purchase (PCP) agreement, the monthly payments can look low. That's because there's a final balloon payment at the end of the contract. This only applies if you want to own the car at the end of the arrangement, and doesn't apply to hire purchase (HP) agreements.

Early termination fees

Last but not least, you may also be charged if you choose to terminate your contract early.

It's a lot to take into account, but all these costs can make an apparently attractive deal less affordable in reality. It's worth making an accurate calculation before you commit to a car finance agreement.

Our finance calculator

As well as carrying out our four-step calculation, you can also our car finance calculator to check how much you can realistically borrow.

You can also run an online eligibility check. This helps you figure out your eligibility for car finance, and it won't affect your credit score at this stage.



So, if you're looking for bad credit car finance in Newcastle, why not apply online today? It only takes a couple of minutes.