How to set a budget for purchasing your next car

Buying a new car can be an exciting time, especially when you start to imagine yourself cruising in your shiny new (or used) wheels. But, many people tend to forget just how expensive it can be not just to buy a car, but to simply own and maintain one as well.

Here’s how you can find the right car for you, that you can afford, and how to get the right finance on your vehicle.

Draw up a regular budget

Before you go car-shopping, you’ll need to do up a regular budget before factoring in the car itself. This budget might include things like:

• Mortgage and/or rent payments

• Bills and utilities (electricity, water, gas etc.)

• Grocery spending

• Medical expenses

• Discretionary spending (clothes, entertainment etc.)

• Any other debts you might have.

You can draw this budget up yourself by analysing your bank account statements, or you can use free government websites like ASIC’s Moneysmart to fill in the relevant fields. Budgeting apps like Pocketbook can also help you by automatically filtering your spending.

It might be the case that after all of this, you’ll only have a certain amount left to put towards a car loan. You’ll need to bear this in mind when searching.

Don’t be in ‘car loan stress’

There’s a term called mortgage stress, which is generally when 30% or more of your take-home pay goes towards paying a mortgage.

A similar term applies to buying a car which we’ll call car loan stress. Although there’s no official definition of car loan stress, various auto sites and experts generally recommend you don’t put any more than 10-20% of your take-home pay (post-tax) towards car repayments.

Putting too much of your income towards a car can result in financial stress, so be careful you don’t pay too much.

Look at models you can afford

While that brand new Porsche or Tesla sounds great, you have to be realistic about what you can afford. The more expensive the car, the more expensive it will be to finance it, and generally, the greater the running costs will be (see below). In most cases, it might be a better financial option to get yourself a compact and affordable car that can get you from A to B.

When searching for the right car, think about:

• What you’ll be using it for (off-road, commuting etc.)

• How many seats you’ll need

• How much boot space you’ll need

• What kind of safety features you want

And of course, what your budget is.

Don’t be afraid to go used

Don’t discount used cars either. Used cars can still be relatively new and be in good condition, and thanks to the wonders of deprecation, they could have dropped in value by as much as 30% in just the first couple of years of ownership. So if buying a new car is too expensive, look for a second-hand one.

Factor in the ongoing costs of the car

The cost of owning a car doesn’t just stop when you buy it. 2019 reports by the Australian Automobile Association’s (AAA) and RACQ show that the mere act of owning a car can usually cost as much as $10,000 per year when you consider the cost of:

• Your car loan repayments (the biggest cost in most cases): Average of $128 per week

• Fuel: Average of $69 per week

• Car insurance: Average of $25 per week

• Maintenance costs and servicing (tyres, batteries etc.): Average of $30 per week

• Registration and licensing: Average of $31 per week

• Depreciation: Depends on the car, standard models can cost as much as $100 per week on average

So you can spend hundreds of dollars a week on each of these things after you buy the car itself, so it’s imperative you leave room in your budget. These figures are averages too - your car could cost more to own.

Make sure you calculate your borrowing power

If you think you’ve found your dream car and are ready to buy, it’s imperative you calculate your borrowing power before buying (unless you buy the car outright). Using a borrowing power calculator, input your:

• Household income (this could be just you or a combined income with a partner)

• The number of borrowers

• Your number of dependents

• Your expenses from the budget you drew up earlier

• Any other loans you have and your credit limits (if applicable)

Entering this information can give you a fairly accurate idea of what lenders will generally lend to you, which can also tell if you can afford that affordable model you settled on earlier.

Consider a down payment and a balloon payment

To lower the cost of your ongoing car loan repayments, put together a deposit or down-payment for your car the same way you would for a house. This could also boost your chances of approval with the lender.

To keep your ongoing repayments even lower, you can use what’s called a balloon payment for your car loan, which lets you make a final lump sum payment at the end of the loan term in exchange for lower repayments.

Balloon payments can make it easier to fit your car loan into your monthly budget and can free up cash for other expenses, as well as allowing you to pay off the balloon by selling or trading in the vehicle at the end of the loan. But on the other hand, the long-term cost of the loan is generally higher and the big lump sum payment at the end of the loan can catch a lot of people out.

Get the right low-rate car loan

If you’re in the market for a new car and need to work out how you’ll pay for it, use loans.com.au’s car loan repayment calculator to find out what kind of repayments you could be looking at, based on the price of your car, your deposit size, the loan term, your balloon payment (if applicable) and of course the interest rate.

To help lower your repayments on your car purchase, you can also check out loans.com.au’s selection of low car loan interest rates and book an appointment with one of our car lending specialists to get started.

Apply now