Published on January 25th, 2023
It’s no surprise that car finance is one of the most popular ways to fund your next car purchase. Buying a car with cash can be the most cost-effective but it’s unlikely that many consumers will have the money to pay for a car outright. With the cost of new and used cars at an all-time high and the cost-of-living crisis, it’s harder than ever to afford a car.
If you’re buying your first car or are looking to get a car on finance, you may be wondering how to afford one and how much money you’ll need to pay. Car finance gives you the ability to pay for a car in monthly instalments but it’s crucial that you can afford to meet each payment on time and in full.
The guide below has been designed to help you decide if you can afford to get a car on finance and how much you should put towards your monthly payments.
How Much Should You Spend On Car Finance?
If you’re looking to get a car on finance, you may be wondering how much you should be spending on your monthly payments. It’s important at your car finance budget is realistic and affordable and that you are able to meet your payments on time and in full.
As a general rule of thumb, it is recommended that you only spend around 10% of your monthly income on your car finance payments. If you’re not sure how much you could afford, you could use a free finance calculator to work out how much you could borrow for car finance and then see which cars are in your budget.
This can give you a more accurate idea of car finance costs and what sort of term length would be best for you.
Why Is Affordability Important?
Your car finance affordability is essentially how much you can put towards your monthly payments. Car finance lenders will usually require you to undergo an affordability check when you apply for car finance to see if you’re eligible.
Each car finance lender will have their own minimum income amount that you will need to meet before you can get approved, but they will generally want to know how much you earn each month and your outgoings.
This can then help lenders to predict how much you could comfortably put towards your car finance payments each month. It would be unethical for lenders to offer car finance to anyone who physically can’t afford to pay it back and goes against the rules of responsible lender.
What Happens If You Fail To Pay Back Your Car Finance?
No matter which type of car finance agreement you have, it’s never a good idea to stop paying your car finance back.
A secured loan such as hire purchase or personal contract purchase means that the lender owns the vehicle throughout the agreement until you come to the end of the agreement or make a payment to settle the finance.
This means that if you fail to repay, the lender has the right to repossess the car from you. Not paying your car finance back can then also lead to more serious financial implications such as defaults, county court judgements and bankruptcy.
If you’re struggling to keep up with finance payments, you should speak with your lender to see how they can help make it more affordable.
Which Factors Affect The Cost Of Car Finance?
When you’re working out your car finance budget, there are also a few other factors you should consider that could make your finance more expensive than it needs to be.
Your credit score is really important when it comes to getting a car on finance. Your credit score indicates how well you’ve managed your previous credit and if you can be trusted to pay back your loans on time.
A bad credit score usually means you’ve struggled to meet repayments or have high levels of debt. This increases the risk when it comes to car finance as you’re more likely to fail to pay back your loan on time and in full.
Car finance lenders can set higher interest rates for those with bad credit to secure the loan. The more you pay in interest will reflect how much you pay overall.
It can seem attractive to choose to finance your next car over the longest term possible. When you choose a longer term, your monthly payments can decrease.
However, you will likely pay more back in interest and be making more payments than you need to. To help reduce this, you should choose the shortest term possible but with the most affordable monthly payments.
Before you start applying for finance it can be worth remembering that some deals will require you to put down a deposit at the start of the agreement.
Putting more down for deals such as hire purchases can be really beneficial as it lowers the loan amount and can make your monthly payments smaller.
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