Buying a new car can be one of the biggest financial decisions you’ll make in your life. Before you even start researching the latest models, you’ll have to set a good budget. A good budget includes not only how much you can spend upfront, but also how much you’re prepared to spend over the life of the car.
Here’s a comprehensive guide to creating the ideal car budget – one that will carry you from the moment you pick up the keys and will keep your new ride running smoothly on the road in the years to come.
Do I really need a budget if I can afford to buy the car outright?
The short answer is yes.
Setting a budget for just the purchase of a new car is an important first step to finding the best deal. But a car budget doesn’t stop there.
A comprehensive car budget is essential as it helps you determine what you can afford now, and how much you will be paying to maintain and run the vehicle. A good car budget can help you make the right choice when it's time to buy a car, whether you're in the market for a new or used vehicle from a small SUV, large family SUV, sports car, hatchback, hybrid or electric model.
Why budgetary control is important when buying a car
Car budgeting not only helps you decide the type of car you can afford but can also affect where you shop for a car. When you buy a car from a dealership, you will most likely pay more than if you bought privately. The advantage to buying through a car dealership is that it can include a warranty and free servicing for a number of years after the initial purchase. These additional perks will affect your overall budget and may be a better choice than buying privately.
However, if you're looking for a better deal in the short term, buying from a private seller can help you save money. Keep in mind that you won't always know exactly what car you're buying and may end up paying more in repairs and maintenance in the long run.
What car expenses should I budget for?
There is a range of expenses that you will budget for, regardless of whether you purchase a car from a dealership, or privately.
As a general rule, car debt should form a small portion of your monthly expenses. Many experts recommend that you spend 10-20% of your monthly take-home pay on car costs, which would include things like your monthly car payment, insurance and petrol.
Car loan repayments
Car loans are one way to buy a car if you don't have enough savings. The amount you pay back will depend on how much you borrow, your interest rate, and how long it takes you to pay off the loan. When comparing loans between lenders, be sure to examine the ‘comparison rate’, not just the interest rate. A comparison rate is expressed as a percentage (like an interest rate), but instead, this rate indicates the real cost of a loan as it includes all hidden fees.
The rate that you’re eligible for will depend on a number of factors including your credit score. Essentially, a lender will be more likely to offer you a lower rate if they’re confident that you’ll be able to meet your repayment obligations after they lend money to you.
If you’re looking to save some money on the purchase price of a car, it can be a good idea to look into buying a used car. Keep in mind though that you’ll probably end up paying a higher interest rate than if you had bought a brand new vehicle.
According to Australian law, your car must be registered before you buckle up. Each state and territory's registration fees differ, but one thing is for sure, it’s an annual fee that must be paid to ensure your car can legally stay on the road.
Regardless of what state you live in, or whether you buy new or old, you will need to pay stamp duty. Stamp duty varies in each state and territory, but it usually ranges from 2% - 5% of the total sale cost.
The level of car insurance you have is based on your needs and your budget. However, every car on the road must have compulsory third-party (CTP) insurance as a bare minimum.
CTP insurance provides owners and drivers of registered cars with liability cover for costs incurred if they cause a crash that results in an injury to another person.
Higher levels of insurance can be purchased as well, including ‘comprehensive insurance’, which covers damage caused to your car, as well as damage your car may cause to other vehicles and property – regardless of whose fault it is. It can also include damage to your car caused by malicious intent, theft, fire, and hail.
Insurance can usually be paid monthly, or yearly depending upon your insurance provider. Insurance costs vary greatly and depend on a number of factors, such as your age, driving record, where you live, and the car you drive.
If you’re looking at buying and financing a commercial vehicle, you may need to look into taking out additional insurance like Public and Products Liability Insurance.
Repairs and maintenance costs
A car’s service and repair costs can vary greatly depending on what you drive and the frequency with which you need to visit the mechanic.
If you have purchased your car at a dealership, they may offer you fixed-price servicing or free servicing for a limited period, which can make a significant difference in deciding which car fits your budget. Remember, too, that you have to factor in the cost of purchasing tyres, cleaning materials and replacement parts into your budget if they aren’t covered by any car warranty offered by dealerships.
Before buying a car, it's important to know how much fuel will cost and how best to budget for it. Car manufacturers provide the estimated fuel economy in litres per 100 kilometres or L/100km. To determine how much fuel your new car will cost, simply add the number of kilometres you travel each week and compare it against the car manufacturer’s estimated fuel economy rate.
Learn more: How much to spend on a car - a complete guide
What car expenses are tax-deductible?
Some individuals and companies can claim work-related car expenses as deductions when completing their tax returns with the Australian Tax Office (ATO). Currently, there are three different methods to work out and claim your ATO car expenses deductions:
The cents per km method
The easiest method of calculating your car expenses deductions. The cents per km method provides a standard rate to cover all of the costs associated with owning and operating a car, including registration, insurance, interests on a loan, lease payments, servicing, repairs, fuel expenses, and depreciation.
Quite simply, the cents per km claim will amount to the business kilometres you’ve driven, multiplied by the year’s rate. The cents per km rate changes each year and you will need to check with ATO to find the latest cents per km formula.
The logbook method
This requires a little more effort, but this method can result in higher deductions. Using this method, your claim is based on the work-related percentage of your car expenses. These expenses include registration, insurance, interest on a loan, lease payments, maintenance, repairs, fuel costs, and depreciation.
The actual costs method
This method is similar to the logbook method, with more stringent recording requirements. In this method, you will need to report your expenses and provide receipts for all expenses - including fuel and oil. In addition, you must maintain a logbook to demonstrate what percentage of travel was for business vs personal use.
Choosing the right car based on your own individual finances is an important decision. Knowing your budget limitations for both the purchase price and the ongoing costs is the first step in making your next car purchase. If you want to see what you could borrow today for your initial purchase, view our easy car loan calculator. Our monthly repayment estimates are fully inclusive of all fees of the lender, so no need to worry about hidden surprises.
Are you interested in financing an electric car? See your EV loan options here to get the best deal.