How much should I spend on a car?
Last updated December 8th, 2023
Buying a new or used car is an exciting prospect. If you’re in the market for a new car, you might be dreaming of driving around in a more prestigious motor, but it’s important not to get too carried away!
Before you commit to buying a car, you should make sure that your chosen model is within your price range. This means not only factoring in the upfront cost or any monthly payments, but also the regular running costs for the car.
In this guide, we will share practical advice on how to budget for your next car – and break down all the major costs that you should consider before buying. We’ll also explain how to work out what you can afford to spend on a car when utilising a finance plan – and paying with cash.
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How should I budget for a new car?
There’s plenty to think about when deciding how much to spend on a new car. Here are just a few of the factors that you should take into consideration when setting a budget for your next purchase:
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Salary
Your salary is probably the biggest deciding factor for your budget, especially if you’re planning to utilise a car finance plan.
You should be spending no more than 20% of your monthly income (after tax) on your new car (this includes any monthly payments and running costs). For example, if your monthly income breaks down to around £2,000, the total monthly cost for your vehicle should ideally be less than £400.
If you have the means to buy a car with cash (or pay for it outright), you can avoid the additional cost of interest payments. (However, a new car is always a major purchase, so weigh up your options carefully.)
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Running costs
It’s also important to consider what you’re willing to spend on fuel, road tax and car insurance. (These costs vary depending on the make and model you choose.) After all, it’s no good spending a large chunk of your monthly income paying for a car that you can’t afford to run!
If you’re keen to keep running costs low, it’s worth considering making the switch to an electric car. EVs are usually cheaper to run and exempt from road tax (until 2025). Just bear in mind that EVs are often more expensive than traditionally fuelled cars, so your monthly car payments may be higher.
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Insurance
It’s worth working out how much you are likely to pay for insurance when budgeting for your new car. Insurance costs vary depending on the make and model of your vehicle, as well as factors such as your age, location and where you usually park your car.
How much can I afford for a new car on finance?
To work out the maximum monthly car finance payment you can comfortably afford:
- Calculate 20% of your monthly income (after tax).
- Work out the additional monthly running costs for your chosen model (including road tax, insurance and fuel).
- Subtract the total monthly running costs from the first figure to work out your maximum monthly finance payment.
If you are considering several different models, remember to work out the running costs for each to determine how much you can feasibly spend on finance.
Keep in mind that different finance providers will have different agreements as far as payment plans, schedules and interest are concerned. Therefore, you should compare payment plans from several different providers to decide which is best for your specific needs.
How much can I afford to pay for a new car with cash?
If you sell your car and already have some savings, you may be in good position to buy your next car with cash. This will allow you to avoid the interest payments associated with car finance plans, saving you money in the longer term.
In this instance, your only limit is the amount of cash you have saved. Keep in mind that you may wish to set some money aside for added extras or to pay towards insurance, tax and other motoring costs.
If you are seriously considering buying a specific car, enter its reg number into our free car valuation tool. This will help you to gauge whether you’re getting a good deal.