Making Cents: Car repayments – How much can you afford?

According to a recent report from the Banking & Payments Federation Ireland (BPFI) there has been a notable increase in the number of people borrowing money to purchase cars.
The BPFI discovered that during the third quarter of 2024 more than 17,000 car loans were drawn down which is nearly 14% higher than the same period in 2023.
The average car loan for the period (July-September 2024) was €13,434, which was up by €835 year on year.
Given these numbers I thought I’d address this area in this week’s article and answer a question that I’m asked more often at this time of the year more than any other time and its’, how much should my car loan repayment be?
Aside from buying a house, for most buying a car is the second most expensive purchase they’ll ever make, so they want to make sure they get it right.
And getting it right is making sure that if you’re borrowing money to fund the purchase, you don’t end up paying too much every month.
And there are some rules of thumb that are often bandied about in this regard but the one I like most is called the 1/10th rule and that’s where you don’t spend any more than 10% of your gross annual income on car loan repayments.
So, if for example you earn €50,000, your annual car monthly repayments shouldn’t be greater than €5,000. If you earn €75,000, they shouldn’t be more than €7,500 every year or €625 per month and so on.
I’ve heard some financial advisers suggest that this monthly cost can be as high as 15% of your net monthly income, but personally I think that’s too high and I say that because I see first-hand the impact high car repayments can have on other areas of people’s finances i.e. they can’t contribute as much as they should be to their pension or savings accounts or they struggle with monthly cash flow or they’d struggle to keep up with repayments if their income was to reduce etc.
The sweet spot with having car repayments or any other loan repayments for that matter is still being able to put somewhere between 10% and 20% of your monthly income into savings and retirement accounts, being able to cover all of your essential expenses each month and after all of that still have some money left over at the end of the month that’s yours to spend on whatever you want to.
A big ask I know.
But you don’t want to purchase a car without first knowing how that monthly cost will impact other areas of your finances. Will it mean you have to reduce the amount you save or will it put you under pressure with cash flow each month?
It might or it might show that you could in fact borrow more if you wanted to without impacting any other areas of your finances, but I think plugging whatever that future monthly cost would be into what your present income and outgoings are and seeing what your finances will look like then is an exercise worth doing.
Because it could confirm as I said that you could handle monthly repayments that are far greater than the 10% number that I’m suggesting or it could that you need to dial it back to say 5% of your monthly income but I’d say just look before you commit to anything.
And of course, a monthly loan repayment isn’t the only thing you’ve got to be mindful of. There are other monthly outgoings you have to factor into the running cost of a car i.e. tax, insurance, maintenance, parking, tolls, fuel etc.
So you need to be cognisant of what they are as well and how much they’ll cost, which is why I think the 10% rule is a good one, because it keeps this particular monthly outlay in check with your monthly income.
I’m sure some people reading this will think that if they followed this 10% rule, they’d never be able to buy a decent car given how expensive new and used cars can be. And I guess that’s where the type of finance product you take out can help.
With that in mind, it shouldn’t come as any surprise that about 50% of people who are arranging finance to buy a car are doing so with the help of a Personal Contract Purchase, more commonly known as PCP.
And PCPs are specifically designed to make it more affordable to purchase a new car. They are structured so you pay a deposit and monthly instalments over a fixed term. And the payments are typically lower than say a term loan because all you’re paying for with a PCP is the vehicle’s depreciation over a three or four year term rather than its total value.
As a result you never really own the car outright unless you make one final bullet repayment at the end of the agreement. Or you could also hand the keys back or trade the car in for another using its guaranteed future value feature.
When you look at the numbers of someone earning for example €50,000 and they follow the 10% rule, they would have monthly repayments of c. €416 over four years which would equate to a loan of about €21,000. How much savings they’ll use and/or what the trade in value of their existing car is, will influence how much they can spend on a car.
That same person, earning the same amount could, using a PCP arrangement, buy a car costing c. €55,000 and have 36 monthly repayments of about €369 which is lower than my recommended 10% number. But here’s the kicker, to own the car outright they’d have one more final payment of c. €26,000 otherwise they’d have to give the car back or arrange another PCP type contract on another car.
So, I guess whether you want to own the car outright or just rent it for a period will influence the monthly cost and the price you spend on a car. You can certainly drive a more expensive car using PCP finance than you could if you borrowed money by way of a term loan but regardless of which you choose I think it’s important to keep those repayments under 10% of your gross monthly income. And having said that you’ve also got to familiarise yourself with and understand the type of loan you’re taking on to make sure it’s the right one for you.
I come across people all the time who are driving incredible cars and intuitively you might think they are really well off or they earn a very high income and they may very well do, but when I get to see every aspect of their finances I discover how little some have in savings, and how they’re living on the edge every month and if they suffered an income shock, they’d be in arrears faster than they could say arrears.
And one of the reasons why this is the case, is simply because a very high percentage of their monthly income is going towards car loan repayments. Some of the numbers I come across are staggering, they really are. And you wouldn’t believe the amount some people are paying each month to effectively rent a car.
Let me leave this with you.
I listened to a podcast last year where the topic was; what are the top 10 most common financial mistakes people make. And unsurprisingly to me, there I think at number 7 was: replacing your car too often and buying a new car.
And they weren’t wrong.
Because the real savings with the ownership of a car, is when you have no more monthly repayments, which means that once the loan is repaid, you should continue making those repayments into your savings account rather than into a bank account. If you do, they can be used towards your next purchase and can help you buy a bigger and more expensive car than before without having to take on a bigger loan.
So, the lesson we should take from this is, don’t let the end of a car loan be the trigger to take out a new one.
And secondly just because you can afford the payment doesn’t mean you should buy a new car. Cars are depreciating assets, which means they drop in value as they age. A new car could lose c. 20% to 30% of its value in the first couple of years of ownership.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie