How Much Car Finance Can I Afford?

Trying to figure out how much to spend on your new car? Wondering how much car finance you can really afford? It can feel overwhelming when it comes to making decisions about your car finance but you just need to remember to do your sums and make sure you're realistic.

The guidelines
Ultimately, it's your decision what you decide to spend on your car. Generally though, most people spend between 10-50% of their gross annual income on a car – so if you want to play it safe, aim to spend no more than 35%.

One of the best ways to figure out how much this will be and to see whether you should go lower with the amount is to use one of the many car loan calculators online. They're free, easy and quick to use – giving you instant answers to make your decisions from.

Think about your circumstances
Everyone who needs car finance could have a different set of circumstances. Perhaps you've got the time to keep commuting to work via public transport and are looking at buying a car as a long term goal. On the other hand, you might have a family of five and need to have transport for them as soon as possible – without having any type of deposit to offer.

Figure out what you need and how much you can afford to spend. There's no point taking out car finance that you can't pay back as this could actually lead to bigger financial issues for you further down the line. As tempting as it can be, never take a loan that you aren't 100% confident of repaying within its loan term.

Put down a deposit if you can
If there's any way you can put down a deposit it will really help things in the car finance process. Lenders will be reassured by the fact that you have a deposit and may offer you lower interest rates on the loan – leading to lower overall repayments for the loan.

A deposit also means you'll end up borrowing less in car finance than you would otherwise which means you could be paying less interest on a smaller amount of money.

Consider second hand
Find the right second hand vehicle and you could be getting a great car for a fraction of the price. This means that you'll need less car finance but you'll still be getting a car that you're happy with. If you do decide to buy second hand, make sure you check all the documentation very carefully and have all the registration and title information clear from the seller.

Don't forget the 'extras'
Yep, buying a car is expensive but running a car can also cost a huge amount. Don't forget that once you have bought a car using car finance, you'll still need to budget for expenses such as fuel and regular maintenance. Always have a back up amount saved for unexpected repair work which you often can't predict and can be extremely costly.

Photo by Jiafeng Wang on Unsplash
Photo by Roland Denes on Unsplash