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Budgeting for your car purchase

Budgeting for your car purchase

Once you have an idea of your car needs, it’s good to sit down and work out a budget. 

How much can you afford?

Before talking finance with anyone, you need to work out what you can realistically afford. When you’re caught up in the excitement of buying a car, you can quickly forget the reality of having to pay back a large sum of money.

  • How much do you want to spend on a car? Focus on the total amount, and work backwards. Think about the annual payments and your overall balance. Then, break that down into weekly or monthly instalments.
     
  • Look at your current income and expenses, then figure out where those regular payments will be coming from. Is there wiggle-room for covering your running costs, insurance, roadside assistance etc.? Is it feasible?
     
  • Start investigating options for finance. Refer to the bigger numbers you came to earlier, and revise them down. Having these numbers plotted out in advance is important, because it should prevent any heat-of-the-moment decision-making you can’t afford.

You can find a great deal on the car you want. There’s no reason for you to be stuck with an unmanageable loan and the risks that come with it.

The world of finance

There are a few different avenues for financing your car:

  • Personal loans - A personal loan allows you to borrow a one-off lump sum and make regular, set repayments. You can typically spread your repayments over one to seven years. The longer the term, the smaller the size of the regular repayments you make (but you’ll pay more interest). Personal loans can be secured or unsecured. A secured loan just means you can use an asset as security against the amount borrowed, which lowers the risk from the lenders perspective and (usually) reduces the interest rate while increasing the maximum amount they’ll consider giving you. You can sometimes secure the loan with the car you’re buying.
     
  • Car loans - Using your car as security allows the lender to seize your car if you default on your loan repayments. Car loans usually require that some criteria be met… For new car loans (which often have lower interest rates than used car loans) the car will need to be brand new and purchased from a dealer only. Used car loans vary more widely by lender, but you’ll often find that the car can’t be older than 7 years and there will effectively be a minimum price you’ll have to pay for the car (the loan will need to meet a minimum amount). Each lender is different, so be sure to ask about these things before applying.
     
  • Credit cards - If the amount you need to borrow is not going to meet the minimum required for a car loan then credit cards can be a good option. They often have low interest rates and many come with set interest-free periods.
     
  • Car lease - A car lease is a bit like renting a car for a period, with the option to buy it at the end of the lease for a residual - that is, a value or percentage typically agreed up front.

The last piece of advice we will give is to always read the fine print. Always.

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