Owning a car is still a practical necessity for millions of Brits, particularly in towns and rural areas where public transport is unreliable or can’t provide the same flexibility. For many families it’s what enables work commutes, school drop‑offs, weekend visits and everything in between. Yet as household budgets continue to feel the pressure from rising costs, the idea of funding a vehicle can quickly shift from exciting to overwhelming. What should be a straightforward purchase risks becoming one of the trickiest financial commitments, simply because the true cost of motoring often runs deeper than expected.
Recent data from the UK government highlights just how significant that cost has become: transport now ranks as the second largest category of household spending after housing. This figure takes into account not only the purchase price or monthly finance deal, but also the ongoing costs of fuel, tax, insurance and upkeep. In fact, these rising transport costs have even plunged some families into what the Social Market Foundation calls ‘Transport Poverty’.
However, despite these rising cost pressures, there are ways to get behind the wheel without breaking the bank- and in this guide we’ll give you some really useful tips for how to effectively budget. We’ll outline the hidden costs of ownership, weigh the pros and cons of buying new versus nearly‑new and used, and review the main financing methods available. Further, we’ll touch on handy budgeting strategies such as the 20/4/10 rule and provide practical tips to cut running costs and more.
Understand the True Cost of Car Ownership
It is tempting to approach car ownership by focusing only on the dealer sticker price or the monthly installment for finance. However, those visible figures only represent a small part of the picture. In reality, cars carry a range of ongoing costs which can cumulatively amount to thousands of pounds annually if you’re not careful. Before putting pen to paper on a purchase agreement it pays to take a comprehensive view of what you’re really committing to.
The key costs to keep in mind include:
- Purchase price or monthly finance payments: Whether you pay upfront or spread the cost, this will be the largest initial outlay to plan for.
- Fuel or EV charging costs: Petrol and diesel prices fluctuate, while electric charging is influenced by both domestic electricity tariffs and the availability of public charging infrastructure. The RAC has estimated that annual fuel costs for the average UK driver can easily reach several thousand pounds, depending on driving habits.
- Insurance: The Association of British Insurers reports that the average premium for private motor insurance reached is now £562 (April-June 2025), though younger drivers and those living in urban centres often face significantly higher figures.
- Vehicle Excise Duty (Road Tax): Annual road tax depends on emissions and age of the vehicle, with zero road tax applicable to many fully electric models.
- MOT, servicing and maintenance: The RAC suggests the average UK driver spends between £400 and £500 per year on maintenance, and this can be higher for older cars lacking warranties.
- Emissions and clean‑air zone charges: In an increasing number of UK cities, owners of higher‑polluting vehicles must account for daily charges such as those in London’s ULEZ.
Decide Between New, Nearly-New, or Used
As well as factoring the ongoing costs, deciding whether to purchase a new, nearly-new, or used vehicle is clearly one of the biggest factors that will impact your budgeting. Each option has its pros and cons so it’s worth really thinking about what works best for your current finances.
New vehicles offer the obvious benefit of comprehensive manufacturer warranties, typically ranging from three to seven years, providing peace of mind and protection against unexpected repair costs. Additionally, new cars feature the latest tech , safety features, and fuel efficiency improvements. However, this security comes at a premium, with significantly higher upfront costs and the notorious first-year depreciation hit. According to data from CAP HPI, the average new car loses approximately 20% of its value immediately after leaving the showroom. If you’re thinking of buying a new EV, prepare yourself, as some models could even lose up to 73%.
Alternatively, nearly-new cars could provide a good middle-ground option. These vehicles, (typically less than two years old with relatively low mileage), often retain a substantial portion of the manufacturer’s warranty whilst avoiding the steepest depreciation period. On the other hand, this affordability could come with increased maintenance risks and potentially higher running costs due to lower fuel efficiency.
Finally, going fully used delivers the lowest upfront price and a wider selection within modest budgets. The trade‑off is a greater risk of higher maintenance costs and the possibility of repairs earlier in ownership. If you are thinking of exploring the used car market, conducting thorough checks, reviewing service history, or arranging an independent vehicle inspection can help reduce this risk (and costs) significantly.
To Finance or Purchase Outright?
The method by which you fund a car purchase is equally as important as the choice of vehicle itself. Outright purchases can eliminate ongoing finance costs (and interest repayments) but this option requires having a big lump sum available, which is often unrealistic for a lot of people in the current economic climate.
For most buyers, finance represents a more practical route and there are plenty of good value choices on the market today:
- Personal Contract Purchase (PCP): Offers lower monthly payments with the option at the end to either hand back the car, pay a balloon payment to own it, or trade in for another vehicle.
- Hire Purchase (HP): Spreads the cost across fixed monthly instalments, with ownership transferred at the end.
- Leasing: Essentially long‑term rental without ever owning the car, useful for drivers who prefer regular upgrades.
- Bank Loan: Providing you qualify, a personal loan can finance a purchase outright and you own the car from day one.
If your credit score is less than ideal, it’s worth pointing out that a personal loan could be tricker to get due to tight lending criteria. However, PCP and HP agreements are available even to those with poor credit histories, albeit the interest rates you pay could be higher. The best advice is to explore bad credit car finance options from a reputable broker like ChooseMyCar. The best brokers work with a wide range of lenders that take into account wider affordability factors, and they can help you come to a monthly payment arrangement you can manage.
It’s also worth noting that financing a car in this way may also positively influence your credit score over time, provided repayments are made consistently over time. There are also plenty of other ways to improve your credit score, including ensuring you are checking your profile with the main credit reference agencies (CRAs).
Set a Realistic Budget: The 20/4/10 Rule & More
Establishing a firm budget framework before shopping around for your next car is also one of the best defences against overspending. One popular formula to follow is the “20/4/10” rule: put down at least a 20% deposit, limit finance to four years or fewer, and ensure no more than 10% of your monthly income goes towards total car expenses (including petrol, insurance and tax etc..).
While this rule is useful, it might not be totally appropriate for everyone during the cost of living crisis. Households with lower income and higher fixed costs may need to allocate less, whereas high earners may comfortably stretch beyond the suggested 10%. Other approaches, such as the “50/30/20 rule” of budgeting, can also help balance priorities by capping discretionary spending (including motoring upgrades) at 30% income. The underlying theme is that no single formula suits everyone; flexibility alongside self‑awareness is what ultimately prevents financial strain.
Cutting Costs Without Sacrificing Reliability
While a car will always bring ongoing costs, there are some practical ways to keep these under control without compromising reliability. Choosing vehicles with smaller engines, hybrid drivetrains or full EV systems can notably reduce long‑term fuel and maintenance expenditure. Similarly, researching official fuel efficiency ratings and real‑world driver reviews can guard against vehicles that prove thirsty in practice.
Insurance is another area with lots of variance. Comparison websites such as GoCompare and ComparetheMarket regularly highlight that customers switching insurers at renewal save on average around £300 annually. Rather than auto‑renewing, shopping around every year can be one of the easiest wins in cutting vehicle costs.
Further, servicing at independent local garages rather than main dealer groups can also yield significant annual savings, provided you verify that work is carried out to manufacturer standards and genuine parts are used.
Don’t Forget Long-Term Value
Finally, It is also vital to account for resale value over the course of ownership. Depreciation remains the single largest cost of driving, and different models retain value at radically different rates. Paying slightly more for a popular model at the outset can in fact save money over a four to five year period, as the residual value at resale is notably higher. A typical mid‑range hatchback, for instance, could lose £8,000 in value across three years, compared with £5,000 for a rival with stronger demand.
Finance products like PCP are partly structured to handle depreciation, as monthly payments are based on predicted residual values, effectively shielding you from the steepest drops if you do not exercise the option to buy outright. Understanding this interplay can support more informed decisions around both model choice and finance arrangement.
Checklist to Help You Budget
- Review your credit report via Experian, Equifax, or TransUnion to spot any inaccuracies and gauge eligibility.
- Use online car finance calculators to simulate monthly repayment scenarios and assess affordability.
- Conduct affordability stress tests by asking whether you could still afford repayments if fuel prices rose sharply, interest rates increased, or your income dipped temporarily.
- Gather insurance quotes in advance across several models rather than waiting until you have committed to purchase, since premiums vary heavily.
- Check the full service and MOT history of any used vehicle to avoid inheriting potential repair bills.
- Research resale values with CAP HPI or WhatCar? projections to understand three‑year depreciation patterns.
- Plan for emergency repairs by setting aside a contingency fund, ensuring an unexpected expense does not derail your finances.