How much does it cost to finance a car?

Car finance has become increasingly popular in the UK and is now the preferred method of purchase when it comes to owning a vehicle. In fact, figures released by the Finance & leasing Association (FLA) show that the consumer new car finance market increased month on month during 2022, with applications up 9% compared to 2021. 

Leading market and consumer data company, Statista, demonstrates the appetite we have for car finance in a recent report. From September 2021 to September 2022, two million cars in the UK were bought on finance - you may even be surprised to know that a large percentage of these were used cars. 

Even though car finance is clearly on the rise, it seems that consumers are still unsure about how much car finance will cost them. In a story published by Motor Trader magazine, it explains that feedback from car dealerships in the UK shows that a majority of motorists need help figuring out how much car finance will actually cost. 

Here at Octane Finance, we are here to help you. In this article dedicated to understanding car finance costs, we reveal how much you should be paying for car finance, the average monthly car finance payments in the UK, and how car finance is calculated. Read on to find out more… 

How much car finance can I afford?

If financing a car is a desired option for you, then you’ll firstly need to understand how much car finance you can afford. The best way to work this out is to follow these two simple rules:

1. The monthly amount you pay for car finance should be no more than 10% of your monthly income
2. The total expenses of your car (including finance) should amount to no more than 20% of your monthly income (fuel/charging costs, insurance, tax, servicing etc)

Finance experts have come up with the ‘20-4-10’ rule to help consumers work out how much they should be spending on car finance:

• Allow a 20% upfront deposit 
• Enter into a contract of no more than 4 years
• Don’t spend any more than 10% of your monthly income on car finance

Using the ‘20-4-10’ rule, let’s make the assumption that you’re paid £2,500 a month, which means that you would allow for and could afford to spend up to £250 a month for car finance. Follow these rules and you’ll be on the right track when it comes to working out how much it costs to finance a car. 

How much should I pay for car finance?

How much you should pay for car finance can of course differ from how much you could afford. For example, just because you can afford to make a monthly car finance payment of £300, does it mean you should do so? 

Pushing your finances to the limit is never a good idea. What would happen if you were to lose your job, or be faced with an unexpected expense? A lender will still require you to meet your agreed monthly repayments, no matter what your personal circumstances. 

Our advice is to never hit the ceiling amount of what you can afford for monthly car finance. Instead, work out how much you can afford and then reduce that figure so you are left with a realistic monthly expenditure for car finance. Sometimes it pays to be practical! 

What is the average monthly car finance payment in the UK?

To help put car finance costs into perspective, it’s always good to have an insight into what the average consumer in the UK pays per month to finance a car. Well, to answer that question, us Brits spend an average of £296 per month on car finance. Adding to this, the most popular form of car finance is a Personal Contract Purchase (PCP) agreement.  

How is car finance calculated? 

Interest rates are a key component of calculating car finance - these can be a flat or variable rate - but the rate you’ll be offered depends on your own set of financial circumstances. When you apply for car finance, lenders will consider a number of factors which will affect the likelihood of whether you’ll be approved:

• Your current credit score
• The total value of the car you wish to finance
• The upfront deposit amount you’re planning on putting down
• The loan term you wish to enter into (length of contract) 

Your credit score is an important part of the decision making process for any lender. Not only will this help a finance company determine whether you are a reliable investment, but a good credit score will give you access to more favourable interest rates too.  

Calculate the cost of your car finance

Calculating car finance doesn’t have to be complicated. Here at Octane Finance, we do the hard work for you… 

Work out the cost of car finance at a click of a button thanks to our free car finance calculator which is quick and easy to use. You can use our handy finance calculator tool to understand how much your monthly payments could be, whether you opt for a Hire Purchase (HP) or Personal Contract Purchase (PCP) finance plan. 

As an experienced and trusted broker, we work with a vast range of lenders to secure the best car finance solution for you. Contact us today and you could be one step closer to sitting behind the wheel of your next car.