How much should you spend on a car?

When you’re looking to buy a car, it’s important to determine how much you can spend. You can break it down into your budget, lifestyle, and long-term plans. 

It’s essential to consider not just the price of the vehicle but also ongoing costs like insurance, maintenance, and fuel. You’ll also want to consider how the car’s value will depreciate over time and how long you plan to keep it. 

By weighing all these factors, you can avoid overspending and find a car that suits your needs now and in the future. This guide will help you understand the key factors to consider to make a well-informed decision.

• Understanding your financial situation before buying a car
• Whether to buy a new or used car
• Determining how much you can spend on a car
• Budget considerations when buying a car
• How to manage and reduce ongoing car costs
• Mistakes to avoid when budgeting for your car
• FAQs

Understanding your financial situation before buying a car

Average UK salary

In the UK, the average salary varies depending on the region and industry. As of recent data, the median annual wage is around £33,000, with higher earnings typically found in London and the South East. Jobs in sectors like finance, tech, and healthcare often pay above the national average, while roles in retail or hospitality may offer lower wages.

When deciding how much to spend on a car, you should allocate at most 10-15 % of your annual salary for car payments. Understanding your salary in relation to car costs can help you stay within a comfortable budget.

Other key expenses and budget allocation

In addition to the cost of the car, it’s essential to factor in other vital expenses when planning your budget. These ongoing costs can add up, so make sure to account for the following:

💷 Insurance premiums

⛽ Fuel and maintenance

🛣️ Road tax and MOT

Allocating a portion of your budget for these expenses will help you manage the total cost of car ownership more effectively.

Whether to buy a new or used car

New car

Pros

🟢 Reliability: New cars are less likely to have issues, saving money on repairs. 

🟢 Advanced features: New cars come with the latest safety and technology. 

🟢 Warranty: Most new cars come with a manufacturer’s warranty. 

🟢 Customisation: Buyers can choose specific features and accessories. 

🟢 Financing options: Dealerships offer low-interest financing deals on new cars.

Cons

🔴 Depreciation: New cars lose value quickly, especially in the first few years.

🔴 Higher cost: New cars have a higher price tag than used cars.

🔴 Insurance premiums: Insurance costs for new cars can be higher.

🔴 Limited selection: There may be a limited selection of new cars.

🔴 Initial wear and tear: New cars are still subject to wear and tear.

Used car

Pros

🟢 Lower cost: Used cars are generally cheaper than new ones, saving you money.

🟢 Depreciation: A used car depreciates slower after its big initial drop in value.

🟢 Insurance premiums: Insurance for used cars is often cheaper.

🟢 Better selection: Your budget stretches further, allowing for better models.

🟢 Registration fees: Older cars often have lower registration costs.

Cons

🔴 Maintenance costs: Used cars may need more repairs and replacement parts.

🔴 Warranty: The warranty may have expired, leaving you to cover repair costs.

🔴 Unknown history: Verifying a used car’s past, like accidents, may be difficult. 

🔴 Features: Older cars lack the latest technology, safety features or fuel efficiency.

🔴 Interest rates: Financing options for used cars often have higher interest rates.

Determining how much you can spend on a car

How much you can spend based on your annual income

As mentioned, spending 10-15% of your yearly income on car payments is wise whether you’re buying a new or used car. You can get more value within that budget for used vehicles, while new cars might stretch your spending limit.

For example, if you earn £30,000 per year, a budget of around £3,000 to £4,500 for a car is generally recommended. This ensures you have room in your budget for other expenses like

👍 Insurance

👍 Fuel

👍 Maintenance

The 20% rule with car costs

The 20% rule suggests that all your car-related expenses, like loan payments, insurance, and fuel, shouldn’t exceed 20% of your monthly income. This helps you balance how much you pay on your car with other financial responsibilities, such as house costs and savings. 

Sticking to the 20% rule helps you keep your budget in check when running a vehicle.The financing options for approved used cars

Budget considerations when buying a car

Income v. expenditure analysis

An income v. expenditure analysis lets you understand how much of your income you spend on essential costs such as housing, bills, and savings. By comparing your income to your regular expenses, you can determine how much money is available for car payments and other costs. 

This method ensures you don’t strain your budget when buying a car, helping you maintain financial stability. Plus, it’s always important to consider costs beyond the initial purchase when budgeting for a car.

Other costs to consider when purchasing a car

When buying a vehicle, it’s essential to consider the costs beyond the purchase price, such as insurance, road tax, fuel, and maintenance. These ongoing expenses can add up quickly, so factoring them into your overall car budget is helpful. 

Planning for these costs ensures you’re fully prepared for the financial commitment of owning and running a car.

How to manage and reduce ongoing car costs

Choosing fuel-efficient vehicles to lower expenses

Choosing a fuel-efficient vehicle can significantly lower your running costs, helping you save on fuel and reduce environmental impact. When looking for a car, consider models that maximise fuel economy:

✅ Hybrid or electric options: These tend to be much cheaper to run than traditional petrol or diesel cars.

✅ Smaller engine sizes: Cars with smaller engines often consume less fuel.

✅ Check official MPG ratings: A MPG rating, or miles per gallon rating, gives you a clear idea of how efficiently a vehicle uses fuel.

By choosing wisely, you can keep your ongoing car expenses in check.

Negotiating insurance premiums and understanding excess

Negotiating your insurance premiums and understanding your excess can help you manage the cost of car ownership more effectively. To get the best deal, consider the following:

👉 Shop around: Compare quotes from different providers to find the most competitive rate.

👉 Adjust your excess: Increasing your voluntary excess can lower your premium, but make sure you can afford it in case of a claim.

👉 Bundle policies: Some insurers offer discounts if you combine multiple policies, like home and car insurance.

Understanding these factors will give you greater control over your insurance costs.

Mistakes to avoid when budgeting for your car

When buying a car, it’s important to avoid common mistakes that can lead to overspending. One critical mistake is focusing only on the purchase price and overlooking ongoing costs like insurance, fuel, and maintenance. Another mistake to look out for is underestimating how quickly a new car depreciates, which directly affects its resale value.

It’s also easy to stretch your budget too thin by financing a car beyond your means. Finally, neglecting to shop around for the best loan or insurance rates can result in paying more than necessary over time. 

By avoiding these pitfalls, you’ll keep your car budget on track.

How to save money on your next vehicle purchase

There are several innovative ways to make the most of your budget:

✅ Consider purchasing a used vehicle instead of a brand-new one.

✅ Explore different financing options such as leasing or credit union loans.

✅ Research and compare prices online to find the best deals available.

✅ Look at fuel-efficient vehicles to save on operating costs in the long run.

✅ Explore selling your current vehicle through a service like Motorway for a hassle-free way to put some extra money towards your next purchase.

Looking to buy?

Want to find out more about buying a second-hand car? Check out our guides and learn about the best makes and models for you, what it’s like to buy from dealerships or privately, what to look out for in a used car, and more.

FAQs

What are the biggest expenses of owning a car?

The three most expensive costs of running a car are depreciation, fuel, and insurance. Depreciation is the most considerable cost, as new cars can lose a significant portion of their value within the first few years. Fuel costs can add up, especially for drivers with long commutes. And insurance premiums can be a significant ongoing expense. For more expert guidance on managing car expenses, visit motorway.co.uk.

How do I avoid spending too much on a used car’s ongoing repairs? 

Certain things can help minimise the amount you spend on ongoing repairs for a used car. Give the vehicle a thorough inspection when you buy it, review the maintenance records to see how well it’s been cared for, think about buying an extended warranty to cover any repairs, and keep up with preventative maintenance like regular oil changes.

Thinking of buying a used car?

Got your eye on a second-hand car but not sure you know all you need to know about buying it? Worry no more! Our guides on purchasing used vehicles will help you avoid getting stung when it comes to handing your money over.

• Sell my car
• Track your car value 
• What to look for when buying a used car
• How many different car brands are there
• Is there a cooling-off period when buying a car?
• Car depreciation – the ultimate guide
• How to get the best price for my car
• What does ‘on the road’ price mean?
• What is an approved used car?