MoneyNerd introduces enquiries to The Debt Advice Service and may receive a referral fee. For free, independent guidance and help finding a debt adviser, visit MoneyHelper.
This information and enquiry service is not a full financial assessment or a guarantee of suitability or debt write-off. Debt solutions are not suitable for everyone. Fees may apply, and your credit record and assets may be affected. Get advice on your circumstances before choosing a solution.
A car’s monthly finance payment is only one part of its cost. Insurance, fuel, maintenance and payments due at the beginning or end of an agreement also affect what you can afford.
A useful budget brings these costs together before you commit, leaving room for your other expenses and changes in circumstances.
Start with your household budget
Use the income available to spend after deductions, rather than your salary before tax. Check recent bank statements and payslips instead of relying on estimates.
If your income varies, work out whether the proposed car costs would fit a lower-income month. An average can hide periods when money is tight. Avoid treating occasional bonuses or overtime as guaranteed income.
List your household spending, including housing, utilities, food, childcare and existing repayments. Include less frequent expenses, such as annual bills, and the money you want to set aside.
Keep your current transport costs separate so you can identify which would disappear with a replacement car and which would continue.
There is no single percentage of income that establishes whether a car payment is affordable. The amount available depends on your other commitments and the flexibility in your budget.
Estimate the running costs of the specific car
Use figures for the vehicle you are considering wherever possible.
| Cost | What to check |
|---|---|
| Insurance | A quote for the car, driver and intended use, including the total cost under your chosen payment arrangement. |
| Fuel or charging | Expected mileage, the vehicle’s consumption and the prices you would actually pay. |
| Vehicle tax | The applicable charge for the particular vehicle. |
| Servicing and MOT tests | What is due, when it is due and local prices. |
| Tyres and repairs | The car’s condition, maintenance history and likely replacement costs. |
| Other travel costs | Parking, permits, tolls, relevant local driving charges and any breakdown cover you choose. |
For annual expenses, dividing the expected bill by 12 gives a monthly budgeting allowance. However, you still need enough money available when the bill falls due.
A repair allowance should reflect the vehicle and your circumstances. A fixed monthly amount cannot guarantee that future repairs will be covered.
Account for upfront and final payments
Check whether you can meet the deposit and any initial fees while retaining money for household bills and unexpected expenses.
Then look beyond the regular instalments. Some agreements have a substantial payment at the end if you want to own the car. If that is your plan, include how you would fund that payment in your budget from the start.
Keep two calculations:
- Monthly cash flow: finance payments, running costs and amounts set aside for future bills.
- Overall cost: the deposit, scheduled payments, relevant fees and any final payment needed for your intended outcome.
A lower monthly instalment does not, by itself, mean a lower overall cost.
Understand what the finance agreement provides
With hire purchase (HP), you hire the car while making the agreed payments. Ownership normally transfers after you have paid everything required under the agreement, including any option-to-purchase fee.
With personal contract purchase (PCP), part of the car’s cost is deferred to an optional final payment, often called a balloon payment. You must pay this, together with any applicable purchase fee, if you want to own the car.
If you return a PCP car at the scheduled end of the agreement, mileage and condition requirements matter. Excess mileage or damage outside the permitted condition standards can result in charges. Returning it early involves different conditions and costs.
For either arrangement, compare the deposit, annual percentage rate (APR), term, fees, total amount payable and ownership conditions. Missed payments can affect your credit record and put the vehicle at risk of repossession.
A longer repayment period can reduce instalments while increasing the overall interest cost. Assess both figures before choosing a term.
Check existing finance before replacing your car
If your current car is on HP or PCP, ask the finance company for a written settlement figure. This tells you the amount required to repay the agreement early. Ask how long the figure is valid and what it includes.
Carplus, a car-finance credit broker, provides an early settlement car finance calculator. Its page contains an estimation tool alongside links to apply for finance. Carplus states that the calculator excludes extra fees or charges your lender might apply. Use the lender’s settlement statement for the actual amount required.
Compare that figure with a realistic valuation or part-exchange offer. For example, a £9,000 offer against a £10,200 settlement figure leaves a £1,200 shortfall, known as negative equity.
Ask for a written breakdown showing how any shortfall would be paid and how the existing finance would be cleared. If a shortfall is included in new borrowing, it increases the amount financed and can add interest costs. It does not disappear because the monthly payment changes.
Test whether the proposed budget works
If time allows, try setting aside the difference between your current transport spending and the proposed total car cost for a few months.
This can reveal expenses you overlooked or show that the proposed payment leaves too little flexibility. It cannot establish that a multi-year agreement will remain affordable.
Also consider foreseeable changes, such as reduced working hours, parental leave, a house move or increased mileage. Check what would happen if you needed to end the agreement earlier than planned.
If the figures do not leave enough room, revisit the vehicle price, timing of the purchase or other transport options before committing.
If existing payments are becoming difficult
Contact your finance company promptly if you are struggling to make payments, ideally before you miss one.
The MoneyHelper debt advice locator can help you find free debt advice.
