How to budget effectively when purchasing a used vehicle
Purchasing a used vehicle is a significant investment and can be challenging when there are numerous factors to take into consideration. For starters, a shortage in supply has led to used car prices increasing, which may be a particular issue amidst rising inflation and an increase in the cost of living.
As a result, it’s important that you conduct the necessary research and work out your budget. So, let’s take a look at some of the ways you can budget for a used car and be back driving on the road in no time.
What car can you afford?
The first step is to calculate your earnings after tax and deduct your outgoings, such as bills and student loan repayment. This will allow you to figure out what your price range will be when choosing a used car. However, just because you can afford a high-end vehicle doesn’t mean you should choose one. There are many other factors to take into consideration, such as repair and maintenance costs and the price of fuel.
Ideally, you should not spend more than 20% of your take-home income on purchasing and running the car. This is important when thinking of spreading the cost of the car over several months.
What vehicle is right for me?
Once you’ve decided on the amount you’re willing to spend on a car, you’ll need to determine what make and model is best suited to your budget and lifestyle. Initially, consider what size vehicle is required for you to carry out your daily routine.
If you have a large family, you’re going to need a larger and more robust car, like a used DS automobile. Alternatively, if it’s just you that’s going to be using the vehicle, you might want to go with a smaller vehicle with fewer doors.
How much does insurance usually cost?
Before making a purchase, it’s vital that you work out how much the insurance will be on the car. Most companies will have a free quote generator for you to assess the cost beforehand and doing so is fairly simple.
The price of the insurance will depend on several factors, like your occupation, annual mileage, age and driving history. It will also take into account the make and model of the vehicle – cars with a smaller engine will typically have lower insurance premiums and cheaper road tax.
Remember, securing your insurance policy before you drive the vehicle is a legal requirement and should not be dismissed.
What car finance options are available?
If you are unable to purchase the car outright, you may need to consider other financing methods. More often than not, the larger the initial deposit payment, the lower your interest will be due to borrowing less money. Just remember, you shouldn’t really spend more than 15% of your monthly salary on car loan payments.
There are different financing options available for used cars, which some dealerships may offer:
- Personal Contract Purchase (PCP) – You pay a deposit on the car and then monthly payments that cover the depreciation of the vehicle. At the end of the contract, you can either pay a lump sum to keep the car or you can return it.
- Hire Purchase (HP) – You pay an initial deposit and then regular monthly instalments for an agreed length of time. These can be higher than PCP and won’t usually have a mileage limit.
- Personal Contract Hire (PCH) – Essentially a long-term hire car, you lease the used car for a certain period before giving it back to the dealership. You’ll need to pay a deposit and will usually be given a mileage restriction.
- Car Loan – You borrow the funds needed to buy the car and pay off the sum through monthly repayments. This way, you own the car from day one; however, you will need a high credit score to be offered good interest rates.