Buying a car on finance is a great way for drivers to spread the cost of owning their next car! Car finance allows you to set a budget that suits you and make monthly payments till the end of an agreed term. But how do you know how much to spend on a car? It can be hard to know what your affordability for car finance is and some people may not be suitable for finance due to their lack of income. Car finance lenders take a risk when they approve you for finance and need to know that you can afford each and every payment over a number of years. The article below looks at how to effectively budget for a car finance deal and the factors that can affect your affordability.
How to effectively budget for a car:
When it comes to budgeting for a car finance deal, you will need to calculate your affordability for the monthly payments but there are other factors that will need to be consider such as insurance rates, running costs and your credit score.
Review your finances.
The first place you should start is with your current finances. You should take a look at your income and expenditure and see how much is left over. Lenders will require you to know how much you earn and will ask for payslips or bank statements to prove your affordability. As a general rule of thumb, your car finance budget should not be more than 10% of your take home pay. For example, if you get earn £2,000 each month, you should not spend any more than £200 a month on finance.
Check your credit score.
Your credit score can affect the interest rate you are offered by lenders. Lenders use interest rates to reflect the cost of borrowing and a higher interest rate make car financing more expensive. Lenders reward people with good credit with the lowest APR rates for car finance as they are less likely to default on their loans. It can be a good idea to improve your credit score first to help get you a better deal and save you money!
Consider putting down a deposit.
There are many finance deals that require no deposit but having a deposit can be beneficial. If you have any money saved up, it can be a good idea to put a deposit down at the start of the agreement to as it helps to reduce the loan amount. A smaller loan can be paid of faster by choosing a shorter term or it can help to reduce your monthly payments.
Compare loans and terms.
A car finance payment calculator can help you to see how loan term lengths can affect your payments. A loan term is how long you want your finance deal to last and the most common tends to be between 3-5 years. You may notice that when you spread the cost over a longer period, your monthly payment amount will reduce, and this can help to tailor your finance to your budget. However, when you take longer to pay your loan off, you are paying interest for longer too and it may not end up being the most cost-effective in the long run.
Running costs of a car.
Once you’ve settled on a budget for a car and an affordable finance agreement, unfortunately, the payments don’t stop there. In fact, the running costs of your next car should be factored into your budget. You will need to consider fuel costs, MOT and servicing, car road tax and breakdown cover (if you want it). Some cars can be more expensive to run than others and choosing the wrong car for your circumstances can be costing you money.
Insurance rates.
Care insurance in the UK is legal requirement for anyone wanting to drive a car on the roads. Your car must have a valid insurance premium in place so it’s worth considering the cost when working out your budget for finance. Some cars can cost more to insure than others and if you want to keep costs low, it can be a good idea to choose a car in a low insurance group. Personal circumstances such as your driving experience can also affect insurance rates so it can be worth comparing premiums to get an idea of how much you could be paying.