How Much Should I Spend On A Car?

Chloe Murphy 5 minutes Published: 08/11/2021

For the majority of us, a car will be one of the most expensive things we ever buy. Though the average price of a car can be fairly high, for many people, having a car is essential. 

But whether you need it for work, or just want a flashy new set of wheels, it’s always important to consider your budget carefully. 

In this article, we’ll walk you through how much you should spend on a car based on what kind of vehicle you need.

How much to spend for a functional, practical car

If you need a small, cheap car to use as a basic runaround, you don’t need to spend a fortune. If it’s a second car or a car that will usually carry just 1 or 2 people, we recommend spending £10-15,000, or roughly 25% of your annual salary

If you don’t need a tonne of space and just want to get from A to B, there’s plenty of budget friendly options. You can get a brand new Dacia Sandero or Kia Picanto for just over £9k, or for as little as £120 per month on a lease.

For something a bit more spacious, for kids, flat-packs, or sports equipment, you don’t need to go all out on a brand new £30k SUV. There are plenty of budget-friendly options, including a new Skoda Octavia Estate at just over £21,000, or around £180 a month on lease.

How much to spend if it's for leisure/pleasure

If you really love cars, and know you’ll look after your car like a new-born baby, you may want to budget slightly more. For a luxurious drive, you’ll be looking at closer to 50% of your annual salary. 

That probably sounds like a huge cost, so it’s important to consider how much you love the car. Buying a more expensive vehicle can be worth the pay off if you’re planning to keep it for the long haul. 

But if you think you’ll want to trade it in a few years, you’re likely to lose a huge chunk of what you paid. In that case, it could be worth looking at how things like how car leasing works.

Other costs to consider

It’s naturally the most substantial cost to consider, but alongside the upfront price, there’s so many other car running costs. You also need to think about:

  • Insurance - The average insurance cost could come as an unpleasant surprise, with insurance for a new driver particularly pricey. It’s not a great idea to wait until you have your car to wonder why your car insurance is so expensive, so look into premium quotes before making any commitments!
  • Maintenance - Car maintenance costs are often an unfortunate reality of owning a car - sometimes things just go wrong. If it’s a concern, it’s worth checking out your car’s warranty, or taking a look at the most reliable cars or cheapest car to repair.
  • The trim level - You’ve picked out your car and you’re all set, until you realise that the price you looked at was for the entry level trim. Different trim levels can often mean hugely varying costs, and you could end up paying thousands more just to get an infotainment screen and air conditioning. 
  • Tax - Almost everyone has to pay vehicle tax rates, but the more CO2 emissions your car emits, the more expensive it’s going to be. 
  • Fuel - With any ICE car, you need to fuel up your car to use it. If the thought of fluctuating fuel costs stress you out, you could consider an electric car. They have lower running costs, and electric car maintenance costs are typically much less.

On top of the above, it’s also worth remembering that your car is going to depreciate over time. Cars are very rarely investment pieces, and it’s unlikely you’ll make money if you’re thinking of selling it down the line. This is where leasing is appealing, as you never own the car and only pay off the cost of depreciation.

Let’s say you want to buy a mild hybrid Fiat 500. If you bought it upfront, it’s going to cost almost £14,000. But should you decide to sell just two years on, you could lose up to £5,000. This is a pretty hefty chunk of money to lose out on, so if you’re buying, buy wisely - or lease!

Spread of costs 

When it comes to actually paying for the car, there’s a lot to think about. What is the best way to buy a car? Or should you consider financing a car?

In an ideal world, buying the car upfront would be the most cost efficient. You’ve completely covered the cost, and have no additional expenses like interest to worry about.  But in reality, that won’t work for everyone. 

Financing a car is the preferred option for most people, and allows you to spread the cost between a down payment, then monthly payments over an agreed term. 

However, it’s important to work out what you can afford each month. It’s a good idea to calculate your typical costs per month, then work out what you would have left after paying for your car. This should include the cost of the finance, plus additional expenses like fuel, tax and insurance. 

Once you’ve worked out what you can afford, it’s best to split your payments into the 20/4/10 rule. With this rule, you would:

  • Spend 20% of your car’s cost on the down payment.
  • Finance for 4 years or less.
  • Spend only 10% of monthly earnings on the monthly payments.

This method works well for most people. A higher down payment means you pay less overall due to lesser interest, and limiting your finance is always a good idea. If you’re trying to stretch your finance deal out beyond 5+ years, you’re going to pay heavily in interest, so it could be worth looking at lower cost options.

Conclusion

Buying a car should be an exciting experience, but can be stressful if you don’t budget carefully. When buying, don’t forget to check out our guides to the best time to buy a new car and what car you should buy.

If you’ve realised that buying might not be for you, you might want to lease instead. Leasing can work out as a cheaper alternative to buying and quickly reselling, and saves all the hassle of selling it on. Just read through how car leasing works, then decide whether you want to lease or buy a car.