How should you budget for car finance?

When it comes to making car finance repayments, can you say for sure that you’re “guaranteed” to find the money each month, and are therefore a good bet for a lender? Hmm… How many of us can safely say that? It doesn’t mean you’re a first class swot if you spend some time looking at the numbers – it means you’ve got a sensible head on your shoulders!

budgeting for car finance doesn't require a degree!

Instead of leaving it to chance and risking everything on a hunch that it’ll be alright let’s look at some financial planning do’s and don’t’s. (And I promise, you don’t need a degree to do this!)

Often, excitement at the prospect of soon being on the road with a new set of wheels can see borrowers rush things and not take enough care – when getting the calculator, pad and pen out, to see how much money they can realistically afford to shell out each month towards a new vehicle. This can leave borrowers overstretched, resulting in missing payments, meaning that the car may soon have to be sold (or if it’s been purchased on HP, returned to the car financing company.) What a shame.

So, the moral of the story is, when falling in love with a particular make and model of car, and taking steps to organise car finance, before signing anything ask yourself first not only will it fit in your garage, but will it definitely also fit your budget?!

Online budget planners – handy

What’s that saying? “Fail to plan, plan to fail” (. That’s certainly all too often true about sorting out car leasing, which is somewhat surprising considering that budgeting correctly for a car is easier now than ever thanks to online budget planners, like this free online budget planning tool for example.

What do I need to include in my budget?

There’s plenty of research out there about car running costs, but to summarise, when working out how much you can afford to repay each month on a car loan, do remember to factor in all these other car-related costs:

  • Fuel – What will you be using the car for primarily? Is it for work or purely as a runabout: to get to the shops, the gym, the local school, for socialising…? Or will it be used for both work and play? Try working out how many miles you’ll be doing on average each week or month, and estimate the fuel costs involved.
  • What about road tax? Will you pay monthly by direct debit, or cough up for the lot in one stroke? Again, add this to your running costs calculations list.
  • Car insurance is something else to factor in. These days, shopping around for a good deal can really pay off. With a particular type of vehicle in mind, do your homework, take your time, be thorough, and see how various insurance quotes match up.
  • Comparing the cost of Breakdown Cover and Roadside Recovery is also well worth doing, before taking out a policy. Being covered will give you peace of mind, of course, so do seriously consider getting this and seek to arrange cover activation as soon as possible after purchasing your new car (or happily driving it away on HP).
  • Don’t forget about annual MOT, possibly replacing parts (tyres for example) and of course, servicing costs. Even with new cars, sooner or later something is going to need looking at. When you set up your budget ensure you can meet any servicing and repair fees, when the time comes.

Finally, one common mistake car buyers make is to miscalculate when planning to draw from savings (to meet monthly repayments on a car loan). Although you probably won’t need to stump up for a deposit, if you plan to draw from a bank or building society lump sum to meet your car finance costs over time, are you sure you’ve got enough cash tucked away for the entire duration of the loan period?

So the message we can take from all of the above is that it doesn’t need to be a painful experience when you’re putting your budget together – in fact, taking control of your finances can be an extremely liberating experience. Enjoy!