How to budget for a car

Learn about what you should think about when budgeting and saving for a car.

Written by Team Aqua and Vanessa Stewart

Published: 07/01/20Published on January 7th, 2020

Last reviewed: 21/09/23Last reviewed on September 21st, 2023

7 mins read

Whether you're buying brand new, finding a second-hand deal or leasing, getting a car can be a big expense. And it's not just the cost of the vehicle to think about, too, with other costs such as insurance and tax. Aqua are here to help you get in top financial shape. In this guide we'll share what to think about when budgeting and saving for a car and help you find out about the different finance options available.

How to begin saving for a car

With the up-front cost of the car alongside daily and annual running costs such as fuel, MOTs, road tax, and insurance, it's important to look at your monthly budget to see how much you can comfortably afford.

With a bit of organisation and a few money saving tips and tricks, learning how to budget for a car is easier than you think.

If you don't already have a household budget it's a good idea to create one so you can make the most of your money each month. Laying out your monthly incomings and outgoings in one place will help you work out how much you can save each month to buy your car, and making use of some simple everyday budgeting tips could help you reach your goal sooner.

Before you buy a car, you should work out what you can afford on running costs as well as getting the best deal on the asking price or monthly payments.

Finance options

There are a few options to make buying a car affordable for any budget. The first one is to save up and pay for it all in one go. This is of course more achievable if you've got the time to save or are interested in buying a used car.

However, if you're short on time and need to upgrade your current vehicle for family or work purposes, there are other options. Most dealerships will have finance offers, or you could also apply for a loan.

It's important to bear in mind that any finance option will be subject to a full credit check. If you're worried about being approved for credit, it's best to look at other options like saving up or buying second hand.

Dealership finance

If you're looking to buy through a dealership on finance, shop around – not just for the best car, but also for the best finance offer. Most will take into consideration your deposit and offer flexibility on the length of your loan. Some will also offer you additional savings if you trade in your current car to offset against the price.

Typically there are two types of car financing that a dealership will offer, so it's key to work out which one is best for you:

Hire-Purchase Finance (HPF)

A hire-purchase is the simplest financing option to get from a dealership. You're securing a loan against the car and are typically expected to put down a 10% deposit. Your monthly repayments are a set amount covering the remaining cost of the car and the interest. This amount will be set for the duration of the agreement making managing your on-going payments easy, and at the end of the agreement, the car belongs to you.

Top tip: Having a larger deposit could make you eligible for interest-free finance offers, saving you hundreds of pounds overall and reducing your monthly repayments.

Personal Contract Purchase (PCP)

A Personal Contract Purchase is a good option if you might want to change your car every couple of years. It's a loan to help you get a car with lower monthly repayments than with HPF. It means you don't pay back the full value of the car, unless you decide to keep it at the end of the agreement. Equally, you won't own the car unless you keep it. If you do decide to keep the car you will need to make a “balloon” (larger) payment at the end of the loan period.

PCP plans usually take into consideration an estimated annual mileage and could result in additional costs if you go over, so you should make sure that you understand the terms and conditions and have discussed any additional costs with the dealer before committing to the agreement.

Personal Loans

A personal loan can be a good option if you don't have a deposit or would like to spread the payments over a longer period. This would make the monthly payments more manageable but may cost more overall than if you put down a deposit and make repayments over a shorter period.

Loan interest rates can vary depending on your credit rating, but there are a number of things you can do to improve yours. To put yourself in the best position to get offered a more favourable interest rate take a look at our guide on building credit.

What about car leasing?

Car leasing or Personal Contract Hire (PCH) is essentially a long-term car rental agreement with a fixed monthly payment. The leasing company still owns the car and at the end of the agreement you give it back. Leasing is a great option if you don't have the money available to buy a car since the up-front deposit is often lower than if you buy. The other factor you need to think about is whether you can make the monthly payments.

What are the pros of car leasing?

• Lower up-front payment
• Monthly payments can be lower than loan repayments
• Maintenance costs are lower with newer cars
• Credit for leasing maybe easier to get than other financing options
• The cars usually come with a warranty, keeping servicing costs down

What are the cons of car leasing?

• Your insurance costs may be higher to cover gap insurance
• You may be charged fees for damage to the car or additional mileage at the end of the leasing term
• If your lease agreements require deposits, this can be quite costly if you're choosing this option repeatedly
• As long as you are leasing you will always have a monthly cost

New or used car?

Another thing to consider when buying a car is whether to buy new or used. It's a big decision to make, because they could mean different things for your future budget, and there are pros and cons for both options.

New cars come with a warranty, are exempt from MOT for the first three years, and generally have fewer problems. This means that the maintenance costs are very low to begin with. In addition, a new car is likely to be more fuel-efficient and have lower CO2 emissions, which means you could pay less overall for running costs like fuel, road tax and in some cases residential parking permits.

Obviously, a new car costs more than its used counterpart does, partly because new cars lose a lot of value in the first few years of owning them. In fact, the average depreciation is around 15-35% in the first year, and around 50% over the first three years. If you want to sell the car within a few years of buying it, you should expect the market value to potentially be thousands less than what you paid due to depreciation. This is where leasing or a PCP plan may be more beneficial.

Used cars on the other hand can be sold for price similar to what you originally paid a few years after buying it, depending on how you've looked after the car and what mileage you've added. They‘re easier to save up for and buy outright, or if you do choose to take out financing, the loan value would be lower and most likely for a shorter term with more manageable payments.

A used car outside of warranty will need a yearly MOT which could mean higher servicing costs. Also depending on how old the car is and how efficient/eco-friendly it is, the road tax and fuel costs may be higher.

Either way, whether you choose to buy a new or used car, it's important to always research your car and the associated running costs against your household budget to see what the best long term solution is for you.

Are there benefits in going electric/hybrid?

Think an electric car is out of your budget? That might not be the case. As well as being more cost effective to run, there are government grants available of up to £3,500 on eligible cars.

Yes, not only are they more environmentally friendly, but electric or hybrid cars are generally cheaper to run than their petrol or diesel counterparts are. This isn't just because electricity is cheaper than regular fuel, but because of their lower CO2 emissions, hybrid car owners pay lower rates of road tax, and electric car owners don't pay any. Some councils also offer discounts on parking permit for low emission cars too.

You may need to factor in the added cost of getting a charge-point at home if you want one, but there are additional government grants available to help with this cost.

Contributors

Team Aqua

Aqua’s contributors are experts in their field, from a range of backgrounds including banking and lending.

Vanessa Stewart

Vanessa is an editor at Aqua.