Looking to purchase a new car but unsure of your options? In the current financial climate, it can be tricky to understand affordability but it is more important than ever to ensure you’re making informed decisions when it comes to money.
Whilst car finance can be a great option if you don’t have the means to buy the car outright, you will still need to calculate which car loan is best suited to your finances and lifestyle to ensure it is affordable.
Below, Jo Robinson, Director of Lenders at car finance specialist Zuto shares her advice on how to ensure you secure a car finance deal that is not stretching beyond your means.
- Begin by understanding how your salary could translate into monthly payments
Jo advises: “Many people believe that your car finance deal depends entirely on your salary and whilst that is not the case, it is a good starting point when considering affordability. As a general rule, the higher your salary, the higher you can typically afford to borrow.
To help guide you through how much you could afford to borrow based on your income, Zuto has delved into their customer data to identify the average of loan against income*.
“Looking at our customer profiles, we can see there is a strong correlation between annual income and average loan. For example, those currently earning between £20,000-£25,000 p/y are borrowing an average of £8,082 over the course of their car finance agreement, which works out as 8.28% of their salary each year, plus interest. Those earning a higher salary of £70,000-£75,000 are typically borrowing £15,328, working out at 4.79% of their income each year, over the course of their contract, plus interest.
When you’re trying to figure out how much you can afford to spend on monthly car repayments, it’s important to only borrow what you can comfortably afford to repay each month, taking all outgoings into account. A loan over a longer period of time typically lowers monthly repayments, so would allow you to borrow a larger amount whilst still making sure repayments are manageable, but overall interest paid will be higher.
Jo adds: “I would always advise against inflating your income on your car finance application and encourage people to be as transparent as possible, particularly during the cost of living crisis when affordability matters more than ever.”
- Consider any other forms of income you regularly receive
Whilst your annual salary is a good indication of how much you could afford to borrow, some lenders may also take other forms of income into account.
Jo explains: “There are many factors you need to consider when calculating affordability for car finance, including other streams of income aside from your salary. This could be things such as child maintenance allowance or other types of benefits, as some lenders may take other forms of income into account when deciding what you can realistically afford to borrow.”
- Get to grips with your expenses
Your outgoings are just as important as your income when it comes to understanding how much you can afford.
Jo says: “Creating a solid budgeting plan is really important when it comes to car finance, as well as other types of loans. Understanding just how much you typically spend on essentials such as groceries, rent and utility bills, as well as subscriptions and purchases will help you make an informed decision about the type of car you can afford to finance. Once you’ve written down all of your daily expenses, how much are you left with?”
- Avoid applying until you have a regular income
Not everyone has a regular income, whether that is down to self-employment or other personal circumstances. But it is crucial you’re confident in having enough to cover all your expenses and monthly payments each month.
Jo urges: “Having a stable income when it comes to making an application will help ensure that you are making an informed decision. So if you’re currently making the switch to self-employment or changing jobs, it could be worth waiting a few months to work out your affordability against any changes to your income. If you are self-employed, lenders may ask you to provide extra information to support your application so that they can verify your income – including submitting bank statements or using open banking.”
- Ensure you’re aware of other costs associated with car maintenance
Car ownership can be expensive, so it’s vital that you take all costs associated with this purchase into consideration.
Jo says: “If you’re looking to become a car owner for the first time, you should familiarise yourself with the additional costs that come with this purchase. When it comes to budgeting your expenses, you should add in rough estimates for fuel consumption, servicing and maintenance of your car, MOTs, vehicle tax and car insurance, which can quickly add up.
“Typically, you’ll find that cheaper cars and cars with smaller engines will mean cheaper car insurance, especially for new drivers. Different car models will also differ on fuel consumption performance and overall reliability, so be sure to do your research to help understand potential costs beyond your monthly payments.”
“Looking at our most popularly financed cars, many people often opt for makes such as Vauxhall, Ford and Nissan due to their affordability and reliability.”
- Consider putting down a larger deposit
When considering your options, it’s worth understanding whether putting down a deposit would impact your monthly payments and make them more affordable.
Jo advises: “If you have available money to put down a larger deposit on your car, this could be worthwhile. Having a larger deposit will usually mean lower monthly payments, which may suit your regular income and lifestyle more.”
To help you understand the amount you could potentially borrow, please visit Zuto’s car finance calculator with no impact on your credit score.