Cash vs finance: how to budget for a car

Baffled by how to set your budget for your next car? Follow our guide to get your head around what you can afford to spend

Christofer Lloyd
Jul 30, 2019

Great second-hand cars can cost as little as £70 per month or less than £5,000, so don’t think you have to spend big money to get a solid, reliable and desirable car. Even sub-three-year old, low mileage family cars could be yours for well under £150 per month or £10,000 outright.

With modern cars becoming ever safer, better equipped, more economical and more reliable, you should be able to get a number of dependable, desirable cars whether you have less than £100 per month to spend, a £500-per-month budget or £50,000 in cash to splash.

Best new cars under £200 per month 
Best used cars for under £200 per month
Best new cars for under £150 per month
Best used cars for under £150 per month
Best new cars for under £100 per month 
Best used cars for under £100 per month

How should I pay for my car: cash or finance?

The biggest decision when working out how much you can afford to spend, is whether you want to pay everything upfront or would rather a lower initial bill and a series of monthly payments with a PCP finance or Hire Purchase deal.

If you have cash to spend and would rather own the car outright and not worry about payments coming out of your account every month, then you’ll need to think about how much money you can spare.

If you have very little in savings, however, and you’d prefer a fixed monthly amount coming out every month, then financing is for you.

Car finance: how much can I afford every month?

Cash buyers: how much of your savings can you afford to spend?

You may have £1,000, £5,000 or even £30,000 worth of savings, but if you spent all of that on a car, would you be able to cover your regular bills, occasional costs like holidays that you've booked but not paid for yet and any unexpected costs like having to buy a new washing machine? Probably not.

So it’s worth thinking about what you need the car for and how much you can justify spending; if you only use it for the occasional trip to the shops and a weekly jaunt to see family 15 miles away, do you really need an immaculate one-year SUV for £25,000? A £7,000 four-year old hatchback should be just fine.

Similarly, if you do 40,000 miles a year, zooming up and down motorways, along deserted rural roads and all across the country, it’s probably wiser to spend £15,000 on a low-mileage, three-year old car than getting a £4,000 12-year old one that’s likely to be less reliable.

When deciding how much of your savings to spend, consider your monthly income and outgoings. If you have much more coming in than going out, spending half of your savings to get a car that suits your needs should be fine, as you can top up your savings pot relatively quickly. However, if you only manage to save £100 every month, spending all your cash could mean that any surprise bills could wipe out all your savings, potentially plunging you into debt.

As a general rule, it’s wise to spend less than half of your savings on a car, provided you can get one that is fit for purpose. If you feel you need to spend a higher proportion, it’s best to do this only if you’re confident you’ll be able to top your savings up quickly. Otherwise, you may not be able to cope financially if you encounter any unexpected bills.

With so many affordable used cars available, however, you could be able to get a far better car for your budget than you expect.

How much cash do I need to spend on my next car?

Want a cheap-to-run city car that should cost barely anything to run? Well under £6,000 gets you a comfortable, practical and reliable three-year old Hyundai i10. Need a spacious, easy-to-drive and economical family car for the lowest cost? Barely £7,000 buys you a four-year old Vauxhall Astra.

Have to have tonnes of space for a combination of children, pushchairs, luggage and shopping in a fuel efficient, comfortable and safe package? Well under £10,000 gets you the keys to a four-year old Skoda Octavia Estate. And if you really want an upmarket SUV, you can get a relatively low mileage 2015 Volkswagen Tiguan for less than £12,000.

This means that there’s no need to blow the budget and spend £15,000, £20,000 or even £30,000 if you can’t afford it. If you do want something more interesting, though, and can justify spending the cash, there are tonnes of exciting ways to spend your money.

Best used cars for under £250 per month
Best used cars for under £300 per month
Best new cars for under £300 per month
Best used cars for under £500 per month
Best new cars for under £500 per month

Car finance: should I go for PCP finance or Hire Purchase?

Should you prefer the pay-monthly option, consider whether it’s important to you to own the car or if you simply want the lowest monthly payments and are happy to put down another deposit after several years, followed by a series of payments to get into another car.

If ownership is important to you, then look into Hire Purchase; you get relatively affordable monthly instalments, and own the car outright once you’ve made all the payments. As you’re paying off the debt faster than with PCP finance, you’ll pay less interest overall, too.

If you simply want the lowest monthly payments, however, choose PCP finance; you’ll have smaller monthly bills and can hand the car back when the contract ends, put down another deposit and get a new one.

As you don’t own the car with PCP - unless you make the large optional final payment - you’ll want to put some money aside during the contract for your next finance deposit, though. Otherwise, you may find your monthly payments ramping up when it comes time to trade up, as the less you put down on a deposit next time around, the higher the instalments will be.

Best used cars for under £20,000
Best new cars for under £20,000
Best new cars for under £25,000
Best used cars under £30,000
Best new cars for under £30,000
Best used cars under £40,000

How much can I afford to spend every month?

Set on financing your car? You need to know what you can spare every month, after all your normal costs are deducted and a little extra put aside for savings and to cover any unexpected bills. Fail to work this out and you may find yourself overstretched and unable to meet the payments if you encounter any surprise bills, which could cause you big financial problems.

To work this out, think about your typical monthly take home pay and then deduct your mortgage payments or rent and the amount you spend on household bills every month. Then take off how much you spend on other monthly commitments like food, mobile phone bills and any other regular spending - including travel, leisure and entertainment costs.

Since car finance contracts can last up to five years - and your financial situation could change dramatically over this time - it’s wise to save as much as you can every month, to give you a financial safety net. So set yourself a target of how much you want to save every month.

If you can manage to save 20% of your take home pay - putting this in an instant-access ISA will earn you interest and let you access the money if you need to - this should quickly add up and give you a little extra security in case you suddenly lose your job or your boiler blows up, for instance.

If your salary won’t stretch that far, putting 10% aside should still give you a good safety net after a few months. What you’re left with is the amount you can afford to spend on a car. And if that’s not enough, think about whether there are any luxuries you can cut out to free up some cash. Simply ditching a pricey coffee or two every day, or making your own lunch rather than buying a costly sandwich at work could save you £100 per month or more - more than enough for a car.

               

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