How to budget for your next used car

If you won the lottery tomorrow, a brand new top-of-the-range sports car might be one of your first purchases, but unfortunately (unless my numbers come up in the Euromillions this Friday) that’s not going to happen to many of us in our lifetime. When you’re in the market for your next car, the sensible thing to decide on first is your budget as this can help you make a decision on various factors including:

• The make, model, age, mileage and size of car
• If you buy it brand new or second hand
• How you pay for the car (with cash or a car finance agreement)

The key to this step is being realistic, there’s no point in going for a car you can’t afford, or one that will push you into debt. Don’t forget the hidden costs either, it’s not just the car you’re paying for, but the cost of driving it too.

Working out how much you can afford to spend

There are two parts to this question. You’ll need to work out how much money you have initially for a car, and also how much you can afford on a monthly basis.

So, get the calculator out, find a comfy spot to sit down (don’t forget a steaming mug of Early Grey) and take a little time to work out the costs involved with your next car purchase.

First things first - do you have savings you plan to use, and if so will these cover the entire amount for a new car, or a deposit. Work out how much you would like to use for the car (or deposit) and write this down.

The second part is looking at your own finances. It’s not the most enjoyable job in the world but it’s an important task and will save you a lot of stress down the line. Take a look at all of your incomings and outgoings, including the following:

• Salary plus any bonuses or one-off payments
• Any income from anywhere else (interest on savings or investments)
• Household bills (that includes things like energy, water, broadband, TV, insurance, and your mobile phone)
• Any money you spend on dependents - childcare costs or caring for another person
• Travel and holidays
• The fun stuff (that’s going out, takeaways, karaoke nights, breakdancing classes or whatever takes your fancy)

You should now have an overall figure for the amount of money you can put towards a car and the money you're left with every month. When you buy your car, you will need to have enough left over to pay for your ongoing car costs, but we’ll cover that a little later on.

Choosing the right vehicle for you

Your budget will help determine the size, make, model and age of the car you can afford but you’ll also probably want to ask yourself the following questions when deciding which car is right for you:

• How often and how far will you drive it? Do you need a car with a lower mileage or can you make do with a car with a few more miles under its belt?
• Who will regularly be in the car, does it need to be big enough for a couple of child seats in the back?
• What are you using the car for? Do you have anything big/bulky you’ll be carrying around in it?
• Do you want a brand-spanking new car with all the mod cons, or are you happy with an older model?

Cost of insurance

Car insurance is a legal requirement in the UK so you’ll always have to pay for it unless you’ve declared your car as off road.

The cost of car insurance isn’t set in stone - it’s dependent on a range of things including:

• Your age
• Your job
• Where you live
• Your driving history
• The type of car you’re driving
• If you’ve made claims in the past

Therefore while the average cost of car insurance, according to the Association of British Insurers (ABI), is £622 per year, the amount you pay could be higher (or hopefully lower).

Cost of maintenance

When you’ve got your car, you will need to budget for maintenance costs. This includes an MOT once a year, plus repairs if you need them. Remember your car insurance will cover the cost of unforeseen accidents but if it’s just a regular wear and tear injury to your car, you’ll have to foot the bill. 

This is around £613.60 on average, for a second-hand car, according to MoneyHelper.

Running costs

The big outlay for any driver is the fuel, as without it you can’t use your car. It’s one of the most expensive things about having a car, although prices have finally started to come down again (after shooting up in 2022 - 2023).

On average it costs around £1206.40 a year, although prices vary across the country. To find your cheapest price for petrol or diesel, it’s well worth using a free app - such as this one from RAC to track fuel prices near you.

How to pay for your vehicle

You’ve probably now got a good idea of how much money you’re willing to part with for your next car, and the specific set of wheels you’ve got your eyes on.

The next decision (we’re almost there we promise) is how to pay for it. Here are a few options to consider:

• Buying a car with cash: if you have the savings in the bank, you can use them to buy your new car, and it’ll be yours to do with what you like from that point on. There’s no interest to pay and no one else to answer to.
• Using a finance agreement: using a car finance agreement gives you the flexibility of returning the car, swapping it, or keeping it at the end of the contract, depending on the type of agreement you have. See our guide on PCP vs HP for more details. You’ll pay interest on top of the amount borrowed but it can be more affordable if you don’t have the cash to buy a car outright.
• Taking out a bank loan: if you’re approved you could repay the bank rather than a specific car finance lender. You’ll still have repayments to make, and interest to pay, but the car is yours from day one.
• Leasing a car: you’ll never own the car but it’s one option for getting on the road and has no strings attached at the end of your contract.