Buying a car is one of the biggest purchases most people make after a home. Whether you are buying your first car or upgrading, this guide covers everything you need to know — from choosing between new and used, to understanding finance options and the true running costs.
New vs Used Cars
The biggest decision is whether to buy new or used. Here is how they compare:
New Cars
- Depreciation: A new car loses 30–40% of its value in the first year. A £25,000 car could be worth £15,000–£17,500 after 12 months.
- Warranty: Typically 3–7 years, depending on the manufacturer.
- Latest technology: Newer safety features, infotainment systems, and fuel efficiency.
- Higher insurance and tax: Newer cars often sit in higher insurance groups.
Used Cars
- Better value: Someone else absorbs the steepest depreciation.
- Sweet spot: Cars that are 2–3 years old offer the best balance of value, remaining warranty, and modern features.
- Lower insurance and tax: Older cars are usually cheaper to insure and tax.
- Check history: Always check MOT history, service records, and for any outstanding finance.
Verdict: For most buyers, a 2–3 year old used car is the smartest financial choice. You avoid the worst depreciation while still getting a reliable, modern vehicle.
Setting Your Budget
A common mistake is focusing only on the monthly car payment. The true cost of owning a car includes insurance, tax, fuel, servicing, and more.
Rule of thumb: Spend a maximum of 15% of your take-home pay on all car-related costs per year.
| Salary | 15% Budget (Annual) | Monthly Budget |
|---|---|---|
| £25,000 | £3,750 | £312 |
| £30,000 | £4,500 | £375 |
| £35,000 | £5,250 | £438 |
| £40,000 | £6,000 | £500 |
This budget must cover everything — not just the car payment. See the worked example at the end for a full breakdown.
Finance Options
Most people do not pay cash for a car. Here are the main finance options available in the UK:
PCP (Personal Contract Purchase)
PCP is the most popular car finance method in the UK. You pay a deposit, make monthly payments over 2–4 years, and at the end you have three options: return the car, buy it with a final “balloon” payment, or trade it in for a new one.
- Low monthly payments: Because you are only paying for the depreciation during your ownership, not the full car value.
- Balloon payment: A large final payment (the “guaranteed minimum future value”) if you want to keep the car.
- Mileage limits: PCP deals come with an agreed annual mileage. Exceed it and you face per-mile charges.
- Best for: People who like a new car every few years and do not want to own the vehicle outright.
Example: A £20,000 car on a 3-year PCP with £3,000 deposit might cost £200–£250/month, with a balloon payment of around £9,000 at the end.
HP (Hire Purchase)
HP is simpler than PCP. You pay a deposit, make monthly payments, and own the car once the final payment is made. There is no balloon payment.
- Higher monthly payments: You are paying off the full value of the car (minus deposit).
- No mileage limits: You own the car, so drive as much as you like.
- No balloon payment: The car is yours at the end.
- Best for: People who want to own their car long-term and keep it beyond the finance period.
Example: The same £20,000 car on a 3-year HP with £3,000 deposit might cost £350–£400/month, but there is nothing to pay at the end.
Personal Loan
A personal loan from a bank or building society can often be cheaper than PCP or HP. You borrow a fixed amount, pay it back over a set term, and own the car outright from day one.
- Interest rates: Typically 3–10% depending on your credit score and the lender.
- No restrictions: No mileage limits or conditions on the car.
- Shop around: Use comparison sites to find the best rate. A 1% difference can save hundreds over the loan term.
- Best for: Buyers with a good credit score who want the cheapest overall cost.
Example: Borrowing £17,000 over 4 years at 4.5% APR costs approximately £390/month, with total interest of around £1,700.
Paying Cash
If you have the money, paying cash means no interest charges and full ownership from the start. However, tying up a large sum in a depreciating asset means that money is not earning interest or being invested elsewhere.
Best for: People who have spare cash beyond their emergency fund and do not need it for other goals.
Insurance
Car insurance is a legal requirement in the UK. There are three levels of cover:
- Third party only: The legal minimum. Covers damage you cause to others and their property, but not your own car.
- Third party, fire and theft: Adds cover if your car is stolen or damaged by fire.
- Comprehensive: Covers everything above, plus damage to your own car — even if the accident was your fault.
Recommendation: Comprehensive is usually only marginally more expensive than third party and provides far better protection. Always compare quotes.
Where to Compare
- Confused.com
- Compare the Market
- GoCompare
- MoneySupermarket
Tip: Get insurance quotes before you buy the car. Some cars are surprisingly expensive to insure, even if they seem cheap to buy. Check the insurance group (1–50) — lower groups are cheaper.
Road Tax (VED)
Vehicle Excise Duty (VED) is based on CO2 emissions. Rates are set annually by the government.
| Emissions | Annual VED |
|---|---|
| 0 g/km (electric) | £0 |
| 1–50 g/km | £10–£30 |
| 51–75 g/km | £30–£80 |
| 76–90 g/km | £110–£150 |
| 91–100 g/km | £150–£180 |
| 101–110 g/km | £180–£210 |
| 111–120 g/km | £210–£250 |
| 121–130 g/km | £250–£290 |
| 131–140 g/km | £290–£330 |
| 141–150 g/km | £330–£360 |
| 151–165 g/km | £360–£400 |
| 166–175 g/km | £400–£430 |
| 176–185 g/km | £430–£460 |
| 186–195 g/km | £460–£490 |
| 196–205 g/km | £490–£510 |
| 206–225 g/km | £510–£540 |
| 226–255 g/km | £540–£570 |
| Over 255 g/km | £570–£600 |
Note: Cars registered before 1 April 2017 may have different rates. Electric cars currently pay £0 VED, though this may change in future budgets.
Servicing and MOT
Regular maintenance keeps your car safe and holds its resale value.
- MOT: Required annually once the car is 3 years old. Costs up to £54.85 (maximum garage fee). Fails mean the car cannot be driven legally until repaired.
- Service: Recommended every 12 months or 10,000–12,000 miles, whichever comes first. A basic service costs £100–£200; a full service £200–£400.
- Budget: Set aside £300–£500 per year for routine servicing, MOT, and minor repairs.
Tip: Check a car’s MOT history for free at gov.uk/check-mot-history before buying. It reveals advisories, failures, and mileage readings.
Fuel Costs
Fuel is one of the biggest ongoing costs. How much you spend depends on the type of car and how much you drive.
| Fuel Type | Average Annual Cost (10,000 miles) |
|---|---|
| Petrol | £1,400–£1,700 |
| Diesel | £1,200–£1,500 |
| Hybrid | £700–£1,000 |
| Plug-in Hybrid | £400–£700 |
| Electric | £400–£600 |
Electric cars are the cheapest to run. Charging at home on an off-peak tariff (around 8–10p/kWh) costs roughly £400–£600 per year for 10,000 miles. Public rapid charging is more expensive but still cheaper than petrol or diesel.
Worked Example: £30k Salary
Here is a full annual budget breakdown for someone earning £30,000 per year:
| Item | Annual Cost | Monthly Cost |
|---|---|---|
| Car finance (HP, 3-year term) | £2,400 | £200 |
| Insurance (comprehensive) | £800 | £67 |
| Road tax (VED) | £150 | £12.50 |
| Fuel (petrol, 8,000 miles) | £800 | £67 |
| Servicing and MOT | £350 | £29 |
| Total | £4,500 | £375 |
This fits exactly within the 15% rule (£30,000 × 15% = £4,500). If any cost is higher, you need to reduce elsewhere — perhaps by choosing a cheaper car, a smaller engine for lower tax and fuel, or shopping around for insurance.
Car Buying Tips
- Buy 2–3 years old: This is the sweet spot for value. The previous owner takes the biggest depreciation hit, and the car likely still has manufacturer warranty remaining.
- Negotiate the price: Most car prices are negotiable. Research the market value on AutoTrader and use that as your starting point. Start 5–10% below asking.
- Get insurance quotes first: Before committing to a car, get quotes for that specific model. Insurance costs vary dramatically between models.
- Check MOT history: Use the free GOV.UK MOT history checker to spot recurring issues, mileage discrepancies, and past failures.
- Consider electric: If you can charge at home, an electric car can save you £800–£1,000 per year in fuel costs compared to petrol. Factor this into the total cost of ownership.
- Do not overspend: A car is a depreciating asset. Spend as little as you can while meeting your needs. The money saved can go towards a house deposit, investments, or your emergency fund.
References
- RAC — rac.co.uk
- AA — theaa.com
- AutoTrader — autotrader.co.uk
- MoneyHelper — moneyhelper.org.uk
- GOV.UK MOT History — gov.uk/check-mot-history
- Confused.com — confused.com