The car you drive says a lot about you, or so advertisers would have you believe. But what does it say about your finances? A flash car can mask a repayment that’s too big for your wallet. Spending too big can curtail your life, and stymie bigger goals such as saving or investing.

Understanding the true cost of car ownership – and the smartest ways to pay for it – can help you decide whether your car fits your lifestyle or it’s driving you off course financially.

More car debt

People in Ireland are taking out more car loans and in bigger amounts than ever. We took out 20,131 car loans between April and June last year, according to Banking and Payments Federation (BPFI) figures. That’s up 13 per cent year on year.

We took out €260 million in car debt in total over the three months. The average amount we borrowed for a car, new or second-hand, was €12,905 – an increase of €300 on the same period in 2024.

And that’s just bank loans – the BPFI figures don’t include popular forms of car finance available from manufacturers and dealerships.

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But how much is too much to spend on a car? Unlike the affordability threshold for accommodation, which is 30 to 35 per cent of net household income, there are no set guidelines as to what’s a reasonable amount of money to spend on a car.

Before borrowing for a car, look at your monthly budget to ensure other priority costs are covered first, says Karl Cronin of the Money Advice and Budgeting Service (MABS).

Accommodation, food, heat and electricity, medical costs – these should of course get priority.

“A car loan is a reality for many households who rely on it for travel to work, but the loan repayments must be affordable and sustainable to avoid running into difficulties at a later stage,” says Cronin.

There are also other car-related expenses to factor in, such as insurance, fuel, servicing and the national car test.

Some car brands are drastically cheaper than others to insure – Dacia and the Kia Sportage SUV being among them at about €500, according to research by Chill Insurance last year.

The cost of annual motor tax is linked to the engine’s CO2 emissions, so bear that in mind too. Electric vehicles enjoy the lowest motor tax band at just €120 per year, rising to more than €2,000 for more polluting vehicles. Buyers of new electric cars can get a Government grant of up to €3,500.

“We meet people who have borrowed for a car and could meet the monthly repayments initially, but didn’t factor in the running costs, which can increase year on year,” says Cronin.

Loss of income, illness, getting married or having a baby can affect your ability to meet the loan repayments, he says.

Never borrow more than you can comfortably afford to repay, only buy from a reputable car dealer and shop around for insurance as costs can vary widely across the market, he says.

For some, a car is about getting from A to B, and they don’t give a hoot about its brand or age. Others love cars and will be happy to spend their money on one, potentially spending less in other areas, says Cian Callaghan, director of private clients at Metis Ireland.

“A good rule of thumb is that you don’t want to be spending more than 15 per cent of your take-home pay on a car, including the running costs,” says Callaghan.

“That’s not going to apply to everyone, but where the cost of your car is dictating your lifestyle in other areas, if you can’t afford a holiday, to save or to put money into your pension, then I would say your car is too big for your wallet.”

Personal Contract Plan

Hire purchase agreement and a personal contract plan (PCP) are other popular ways to finance a car.

Take a current hire purchase offer on a 2023 Land Rover Discovery, for example. Pay for this car in cash and it will cost about €47,000. Don’t have the money upfront? With a hire purchase deal you could be behind the wheel by the weekend.

Simply pay a cash deposit of €4,700 upfront, and then repayments of about €900 over 60 months and it’s yours.

The interest rate you will pay on this specific hire purchase deal is a whopping 9.35 per cent – so after your final repayment in 2031, you’ll have paid €10,990 more for the car than a cash buyer.

A PCP is a specific type of hire purchase loan offered by car dealerships.

It splits the price of the car into what can look like affordable chunks; an initial deposit, monthly payments, but then a larger final “balloon” payment at the end of the loan period if you want to own the car outright.

This balloon payment essentially postpones a chunk of the cost until the end of the loan period.

The monthly repayment, which includes interest, is typically lower than a personal loan or a standard hire purchase agreement, and this can make it seem like an affordable way of financing a car.

You’ll need to budget ahead for the balloon payment. Until you make this payment, you don’t own the car.

Take for example a brand new Volkswagen Tiguan with a price tag of €50,275 from one particular dealership. To buy this with a PCP, you’ll need a deposit of €15,400, and then monthly repayments of €379 over 36 months. The interest rate is 3.9 per cent.

While €379 a month can seem affordable for a brand-new car, after 36 months of repayments, you still won’t own it – to keep the car, you’ll have to make a final lump sum balloon payment of €24,575.

PCPs can create an illusion of affordability.

“Ultimately, a PCP is a way of helping people to get a car they can’t afford,” says Callaghan. “I would say it is to be avoided at all costs.”

“You can have this illusion that you can afford a particular car – ‘I can afford the repayments, so therefore I should do it’ – but you don’t own the car, you are paying interest on it and you have this looming balloon payment at the end.”

All the risk is with you too – PCPs can come with special caveats around mileage and repairs.

For some PCP borrowers, eventually owning the car is never the aim. Before the balloon payment is due, they simply give the car back to the dealer and sign up to a new PCP on another new car.

Rolling from one PCP to the next can be akin to kicking the can down the road.

If you’re not careful, this type of car finance can become a debt trap, says Callaghan. It can lead to a cycle of three-year PCPs where you never actually own your car.

“It’s just perpetual repayments you are making for the rest of your life, at sometimes around 7 per cent interest. It’s the car company persuading you to buy something you can’t really afford,” he says.

Saving aggressively can help you escape from the expensive cycle of PCPs – so the next time it comes to changing your car, you can afford to pay cash, or at least take out a smaller bank loan each time.

Opportunity cost

If you don’t have an overall financial plan, it can be easy to feel like you can afford a more expensive car, says Callaghan.

“If you have what seems like surplus disposable income, you will find ways of spending it, instead of thinking long term,” says Callaghan.

It’s important to understand the opportunity cost of higher car repayments on your overall financial wellbeing.

“If you use that money better, save it or invest it, maybe you could retire a year or two earlier,” says Callaghan.

“But that’s a values-based decision. Someone might not want to retire earlier, but they do want to drive a nice car, and there is nothing wrong with that.”

Still, some debt is smarter than other debt.

There’s a big difference between spending €500 a month on car finance, where the lender is earning interest from you and the asset is depreciating in value, or instead investing that amount, or putting it into your pension, where you are the one earning a dividend from your money.

“The only real debt you want is low-interest debt, like a mortgage where you are buying an appreciating asset that is going up in value,” says Callaghan.

“But if you are making meaningful pension contributions – and I would say 5 per cent and above is a good start – if you are saving money on a monthly basis and you are able to meet your car repayments, then it’s not a big deal,” he says.

Ideally, you would pay for a car you can afford from savings.

Almost half (45 per cent) of buyers of new or second-hand cars used savings to pay for it, according to a consumer survey commissioned by BPFI in 2022.

About one in five new car buyers used hire purchase or personal contract plans to purchase their car in 2022, according to the survey.

Some 40 per cent of second-hand car buyers used credit union or bank loans. Some 33 per cent of new car buyers did so.

However you intend to pay for the car, just never go to a car showroom without having some numbers in your head, says Callaghan.

“When you are negotiating in a dealership, the endorphins are flowing on both sides. You see this big shiny thing you want and the person selling it is seeing the commission. Everyone kind of wants to get the deal done,” he says.

“Sure you can afford an extra €200 a month on a repayment, but when you realise how much you are paying over five years, maybe you can’t afford it.”