Appropriate planning is essential at any level, especially when finances are in question. Be it a country, a business or a family, planning is the best thing you can do to ensure that the entity functions harmoniously.
People who are not trained as bookkeepers or financiers, often dread the very word “planning”. “Budgeting”? Even a sound of this foreign word can send shivers down your spine. It doesn’t have to be this way – in fact, budgeting is your friend because it enables an individual to live a more fulfilled and stress-free life.
Buying a car is a serious decision that you don’t want to make hastily. Although motoring in most cases is a relatively positive experience, there are expenses (and headaches) associated with owning a car. Let’s look at the main points that you need to consider before buying a car.
Cost of Car Finance
Car finance is a specific lending product that is secured against the car you buy. Compared to a personal loan, you’re much more likely to get a favourable rate when going for a specific product. You may be able to get an unsecured loan, but the rate will be much higher because generally the lender likes to know what the money is going towards. You can use a loan to buy a car but equally, you can simply go and spend it all on a wild shopping spree. And this is where the risk for the lender increases.
Although in the current climate car finance is rather cheap, it does cost money to borrow money. So, for example, if you buy a car that is worth £8,000 with a £1,000 deposit, by the end of a 4-year long finance term, you will have paid almost £2,000 on top of the initial vehicle price. And that’s if you have a good credit rating.
Photo credit : Wollombi
Credit Rating does Matter
I mentioned credit rating on purpose! This is one of the main factors that will determine the cost of your loan. This is simple – the higher your credit rating, the better car you will be able to afford on your budget. In many cases, maintaining a good rating is easier than it may seem. Before applying for car finance it might be a good idea to check your credit file and correct mistakes and resolve issues that are easy to tackle. There are agencies out there that let you look into your dossier on a free trial basis.
To illustrate the difference, I’ll bring up another example. If we were looking at the same £8,000 car but changed the credit rating from good to poor, your monthly repayment would jump from £187 to £222. You can play with various prices and options using a car finance calculator. It is a great tool that lets you understand what car you can really afford.
Budgeting is Easy
The biggest mistake that the modern society made in the last decade was to be spending more money than they could possibly afford. You can blame the greedy bankers or the society in general, but in the end it’s you who decide how much money you will spend. Budgeting is indeed easy – take a sheet of paper and calculate your family’s disposable income (take-home earnings) and calculate your current monthly expenses. Deduct one from the other and you’re left with the sum that you can realistically spend on monthly repayments on your new car.
Always remember that buying a car will create expenses that you previously didn’t have. Maintenance, fuel, tyres, MOTs, road tax, insurance – depending on the car, this will amount to further few thousand pounds per year. All this have to be reflected in your budget. Being sustainable and responsible also means sticking to a budget.