Car Financing – A Pet Peeve of Mine…

I’ve always had a semi-negative view towards the financing of cars. Mostly because where I grew up, I always had the perception that a lot of people financed cars which they otherwise could not afford, which is an illogical way (at least to me) to purchase any depreciating items, let alone cars.

Now, it should be highlighted that personal finance is in fact that…personal. Many people have different ways of looking at it, and it works differently for everyone. However, I’m going to try and back up my viewpoint of the negatives of car finance with a bit of fact and numerical evidence.

My distain for car financing also stems from the fact that my own mother, when I was a young teenager would always finance her cars, and struggle with making the payments amongst mortgage and other expenses. This is speaking retrospectively of course. At the time, I was just excited that the household was getting a brand new car. I also hadn’t owned and had to pay for my own car yet at that age.


Average Car Financing Costs in the UK

The amount spent on car financing has been on the rise for years. In fact, it’s booming! 4.7 million people within the UK are forking out every month for a car payment. This leads to the nations average monthly car payment expenditure totalling around £1.1 billion!

Nationally, the average car payment expenditure per month comes in at £226. However, this is drastically impacted by the region in which you live. Scots are spending significantly less than those in the South East of England, for example. Here is a breakdown of the average monthly spend on car financing per region:


Monthly car finance payments by British region

  • South East: £271
  • London: £269
  • South West: £253
  • East: £229
  • North West: £226
  • West Midlands: £223
  • Yorkshire and Humber: £218
  • Wales: £215
  • North East: £202
  • East Midlands: £192
  • Scotland: £188


Where Should the Money Go?

Let’s say you lived in Scotland, and your monthly car payment was £188, which is £2,256 per year. The average timeframe of someone financing a car is 3 years.

If you had invested £2,256 into a relatively normal returning Index Fund (7% return), you would end your three years with £2,763. Which means your balance will have increased by £507. That’s nothing to write home about, until you compare it to the cost of financing the car. Over the three years, your spend would be: £6,768.

After three years, you are going to finance another car presumably. It is unrealistic that each of your new cars will be the exact same cost, but for the sake of this example, we will stick with an average of £188 a month. This obviously will be impacted by car choice, as well as inflation over time.

20 years of car ownership. At £188 a month, will cost you: £45,120 (EXPENSE)

20 years of a £2,256 Index Fund: £8,730 (INCOME)

20 years of £188 a month investment in Index Fund: £95,956!

Yes, you read that correctly. If you put £188 into a 7% average return Index Fund, over 20 years. You would have £95,956 in the bank.

So, potentially there is an element of thought which might point towards the purchase of a cheap, yet reliable car outright without any ‘badge tax’ (I’m looking at you BMW, Audi, Mercedes etc). If you spent, say, £5,000 on a nice reliable car which will last you 10 years, and put £188 into an index fund instead of a car payment, you will be significantly wealthier.


How Much Should I Spend on a Car?

Other than buying a house, the cost of purchasing a vehicle is probably your next main expense in life for the average person. To answer the question on how much you should spend will stem from a series of questions you need to ask yourself.

Someone who is a ‘car person’ is likely to spend more on a car than someone who is not a car person. However, as a rule, you should spend no more than a specific percentage of your salary on a car. I’ve therefore broken down the percentage into three different areas, based upon the type of owner you are. There is no point in forcing a ‘car guy’ to buy something they are going to hate:

  1. “The Car Guy” – The most expensive option on the list. However, no matter how much you care about your personal finances, if you can afford it AND you’re a car guy…go for this option. Budget around 50% of your annual income on a car. EG – You earn £50,000 a year. You can spend up to £25,000 on a new car.
  2. “Reliable and Comfortable” – You want something which isn’t too expensive, but at the same time, you want some creature comforts such as leather interior or a sat nav. Budget for 20 to 25% of your salary to spend on a new car.
  3. “Cheap and Affordable” – You only see a car as a mode of transport. To get you from A to B. Budget 10 to 15% of your salary on your next car and minimise the expense without getting an absolute rust bucket.

It is incredibly easy to overspend when buying a new car, especially with the myriad of extras which car manufacturers offer these days. Have you ever specced up a Range Rover? Trust me….you’ll be in for a shock. A £35,000 car turns into £60,000 before you’ve even blinked.

Make sure you plan your budget carefully, and know exactly what you’re looking for. Then you won’t be inclined to overspend when it comes down to business.

If you want more tips on saving money so you can put more into your new car, check out my post giving advice on savings.


Should I Finance a Car, or Pay Cash?

I would recommend using this finance vs cash calculator to determine whether or not it would be better to pay cash or finance the vehicle you are looking at. Cash is cheaper every time. However, using your own personal views and knowledge of your finances, you should use this calculator to determine whether the saving is actually worth it.

For example, if paying cash will only save you £500 over 4 years, you might deem that the extra cash in your bank account over those 4 years would be more beneficial for you, and the cost of spending £500 more spread over 4 years is worth the cost. This takes time value of money into consideration.


Summary: Car Financing – Money Down The Drain! Or Is it…

  • Car financing is on the rise
  • You would be better off using car finance money elsewhere
  • Buy what you can afford!
  • What’s cheaper? Finance or Cash