Topic: Loans 17 Feb 2019
Author: Neil Cubley
Tags: Cars

How to work out the true cost of your first car

Bank of Ireland Car Loans

4 MIN READ

Great, you’re considering buying your first car.

But, before you race to the garage forecourt, you want to know if you can really afford it.

Not just the cost of buying the car but the insurance, the fuel, the servicing etc. The whole lot.

Here’s how to work it out.

Buying, owning and running a car

How much a car really costs is made up of:

  1. The price you pay to buy it
  2. The cost of owning it
  3. How much it costs you to run it.

The price you pay to buy a car seems clear enough. But remember, if you take out a loan, then you will be repaying not just what you borrowed but the cost of the credit too.

The cost of owning a car includes the cost of your insurance, tax, NCT and any garage or parking costs etc.

The cost of running a car includes petrol but also the cost of new tyres, oil, services and repairs.

Start by making or reviewing your budget

First, look at your personal and household budget.

Do you already know exactly how much money you have coming in each month and how much you spend on the essentials?

Good, then you know how much money you have left over and can decide how much to allocate to buying and running a car. You can skip ahead to stage 2.

Don’t know the ins and outs of your income and expenses? Then follow these 5 simple steps to create a budget, first.

How to create a personal or household budget

  1. Work out how much money you will have coming in each week or month, after tax and other deductions.
  2. Add up all your essential outgoings like rent, mortgage, gas, electricity, broadband, public transport, insurance, groceries etc.
  3. Next, add up all your non-essential expenses using your last 3 to 6 months of bank statements and receipts to help you get a good idea of your spending.
  4. Take away your essential costs from your income. How much is left?
  5. Finally, subtract your non-essential costs. Now, what’s left? This is your disposable income. The money you have left to spend on what matters to you.

If you have little or nothing left at the end of each week or month then, unfortunately, buying a car isn’t a realistic option right now.

What if you can’t afford to buy a car right now?

You’ll need to reduce your expenses by cutting back on non-essentials or increase your income to make it affordable.

Give yourself a timescale – 3, 6 or 12 months – however long you need to make the changes required to bring your finances on track.

Set a budget for buying your car

When you have a good idea of your disposable income the next thing to do is work out, roughly, how much you can spend to buy a car.

It can help to set a car budget to get you started.

The precise amount you choose – €5,000, €10,000, €20,000 etc – doesn’t matter at this point because you’re simply going to use your figure to help you work out what you can afford.

And you can expect to revise your budget up or down as you find out more.

Using savings to buy your first car

Now you have a car budget, do you have savings that could pay for it?

Using savings will mean you won’t pay interest as you will with a loan but, of course, you might be using up savings that you could need later for other expenses.

For example, do you have savings in a rainy day fund? You might want to prioritise this over buying a car but it depends on your priorities.

Building up your savings first

If you don’t have savings and buying a car isn’t urgent then consider saving regularly for a set length of time to build up your budget.

For example, saving €5,000 means putting away €417 a month over 12 months or €208 a month over 24 months.

Taking out a loan to buy your first car

If you don’t have savings or you have some money saved but not the full amount then maybe consider a loan.

With a loan you repay the amount you borrow over a set time plus the cost of the credit determined by the Annual Percentage Rate.

Example loan repayments

For example, take out a loan for €20,000 at 6.8% APR and repay it over 3 years and you will pay €613 a month for 36 months.

And you will end up paying €22,088 in total after 3 years are up (€20,000 plus €2,088 for the total cost of the credit).

What if the monthly repayments look too high?

You’ve done your personal and household budget so you will be able to see if your monthly repayments – €613 a month in the example above – are affordable.

If not then reduce your car budget and/or shop around to see if you can get a loan with a lower APR.

But, first, you also need to know what it costs to run a car because that will come out of your monthly income too.

Working out the cost of running a car

The true cost of running a car might not be as obvious as what you pay to buy it but it can be considerable.

The AA publishes figures, every year, showing how much it costs the average driver to run a new car for a year.

In 2018, they estimated that the total cost was €10,691.

Which works out at €890 a month.

If that sounds a lot remember that the AA includes all the costs of running a car bought new – from insurance to parking – and depreciation (how much your car loses in value from the day you buy it).

A rough estimate of what a car might cost to buy and run

So, for example, if you are planning to spend €12,000 buying a car using a 3-year loan at 6.8% APR then your monthly repayments will be €371.95 a month.

€371 repayment + €890 running costs = €1,261 a month.

But how do the AA work out the running costs and, more importantly, might you be able to reduce yours?

The working out

Here’s the detail behind the AA figures.

Average standing costs in 2018 for new cars in Bands A to C

Here are the standing costs shown in the 2018 AA report:

  1. Tax ranges from €120 (Band A)* to €390 (Band C)
  2. Insurance goes from €998 (Band A) to €1,348 (Band C)
  3. Garage, parking & miscellaneous €4,058
  4. NCT €20.63
  5. Driving licence €5.50
  6. Depreciation €1,451
  7. Interest on capital €110 (how much you would have earned in interest if you’d saved the money instead)

*The CO2 bands go from A to F but for this article we’ve considered bands A to C. These bands include  the smaller models you are more likely to buy for your first car.

The cost of using your car

Then there’s the cost of actually driving your car around which is kind of the point of buying it in the first place.

How much you pay to use your car depends on how many miles or kilometres you drive each year.

Here’s what the AA found it cost the average driver to use their car per kilometre.

Band A 16.69 cent a km

Band B 20.60 cent a km

Band C 21.89 cent a km

The average distance driven was estimated at 16,000 km a year.

So, if you have a Band A car, you could pay 16.69 cent for every one of the 16,000 kms you drive.

This adds up to €2,670 a year or €225 a month on petrol, tyres, oil, servicing and repairs etc.

That still sounds like a lot

Yes, but remember it is just an estimate.

You might decide, for example, to go back to your car budget and reduce how much you spend to buy a car.

You might find a way of cutting back on those car parking and garage costs.

You might also acknowledge that your car’s value will depreciate and that you will not get the interest you would have got on the money you spent to buy the car. But you might decide not to include these items in the cost of running your car.

Alternatively, you might be able to share a car with another driver and split the costs between you.

Find out more

To find out more about a Bank of Ireland car loan please click here.

Lending criteria, terms and conditions apply. Over 18s only.

The figures and calculations shown above are for illustration purposes only.

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Warning: If you do not meet the repayments on your loan, your account will go into arrears. This may affect your credit rating which may limit your ability to access credit in the future.

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Topic: Loans 17 Feb 2019
Author: Neil Cubley
Tags: Cars

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