Irish car buyers are more keen on taking out loans or other finance packages – personal contract plans or hire-purchase deals – than ever before. The Banking and Payments Federation Ireland (BPFI) has reported a 21.5 per cent year-on-year increase in the volume of loans being taken out for car purchases.
According to the BPFI, this increase means the number of car loans rose to 19,552 in the first quarter of the year, which is the busiest time in Ireland for new car purchases. The value of these loans increased by 25 per cent year-on-year to €259 million.
It also means that the value of the average finance loan on a car (new and used) has increased by €366 to €13,267 on last year, against a backdrop where the average price of a new car in Ireland has ballooned to more than €35,000. That’s an increase of more than €7,000 since 2015.
It is indicative of the fast-rising cost of new cars, as car makers raise their prices to deal with increased tariffs, higher manufacturing costs, and higher levels of research and development investment needed to lay out the path to an electric motoring future.
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Should we be worried by such a significant spike in new car loans, especially given that so far this year the total market for new cars has only grown by 1.59 per cent in terms of the number of new cars registered? That is according to the Society of the Irish Motor Industry (SIMI).
Placed against the average wage figure, according to data from Statista, the price of a new car is potentially not that bad. If an average new car costs €35,000, then against average annual wages of €55,491 (the figure for 2024) that looks credible.
However, there’s a devil in the detail, as such bald comparison figures don’t take into account the spiralling prices in other areas — housing and property, groceries and medical treatments.
The average price of a new car compared to average wages has stayed relatively stable at around 62-63 per cent of the average national wage.
However, Statista suggests that the average wage figure is being artificially skewed by a small number of very high earners and that the more realistic figure is the median wage amount of €43,221. That would mean that the average new car price stands at 80 per cent of the median salary, which is a far more unpleasant comparison.
Then again, the BPFI report notes that the average loan value stands at €13,267, which of course includes both second hand and new purchases. This is in line with a report from car sales website Carzone, which earlier this year pointed out that Irish consumers spend, on average, €16,550 on a car purchase. That suggests they’re paying around €3,200 in the form of a deposit or trade-in and financing the rest.
Going by AIB’s online car loan calculator, €13,000 financed over three years works out at a monthly repayment of €411. With the median monthly salary in Ireland standing at €3,603, that means an average car loan will chew up 11 per cent. Once again, that doesn’t look too bad on paper, but it fails to take into account the bigger chunks taken out by mortgages and food shopping. Mortgages take an average €1,400 out of our bank balances every month, again according to the BPFI.
Many of the dire warnings about car loans and their potential to cause economic upsets are coming from the US market
Does any of this mean that car loans are a potential danger to the economy, though? Could our desire for shiny new transport, at a time of fast-spiralling new car prices, trigger a 2008-style crisis, in the manner of subprime mortgages in the US?
At the moment, that seems unlikely. A spokesperson for the BPFI told The Irish Times that while consumer lending has increased in recent years, the relative level of indebtedness is low and falling thanks to rising household wealth and income.
Citing recent data from the Central Bank, they said the debt-to-assets ratio fell to 11.2 per cent in the fourth quarter of 2024, the lowest level since the data series began in 2002.
“It is important to note that personal loans are not secured on the asset they’re used to purchase,” the spokesperson said. “This means that credit assessments for personal loans, including car loans, are based on a borrower’s repayment capacity, with the residual value of any underlying asset not a determining factor in the credit decision-making process.
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“A consumer survey commissioned by BPFI in 2022 found that almost half (45 per cent) of recent buyers of new or second-hand cars used their savings to pay for the car. Personal loans and other forms of credit, such as hire purchase, help to enhance the affordability of buying a car (which is an important investment for many people) for those who don’t have enough savings.”
Derek Kavanagh, head of motor finance at Bank of Ireland, said: “On the over-indebtedness question, we are not seeing this at present and from our experience based on current used-car market values, customers continue to have equity in their vehicle at the end of the funding term.”
That equity at the end of a loan period — the value of the car versus the value of the loan — is a crucial factor.
Many of the dire warnings about car loans and their potential to cause economic upsets are coming from the US market. While there have been many issues with, and complaints about, the regulations surrounding car loans and credit intermediaries in both Ireland and the UK, our regulatory environment is far stricter than in the US. In the US, one in five people taking out a car loan are now paying more than $1,000 per month (€854), with 22 per cent of car buyers on an 84-month loan. One quarter of US car buyers have reported that their car is worth a whopping $10,000 less than the value of their loans when trade-in time comes around.
So far in Ireland, that hasn’t happened, but car makers and car sellers need to be cautious about the potential monster they’re creating here.
Rising car prices are being kept in check, in an affordability sense, by affordable finance packages which are increasingly being offered by the car companies themselves.
In a statement to The Irish Times, the Central Bank said that in the Irish car finance market, global vehicle manufacturers have overtaken the main retail banks in terms of the provision of car finance.
So, the likes of VW Financial Services, BMW Financial Services, or Renault’s in-house Mobilize bank have become bigger players in the car finance market than the main-street banks or credit unions. This creates a potential issue: car companies are loaning money to consumers to buy their products.
This isn’t necessarily an issue, but if those same car companies are over-extending their loans to try and make up the gap between what a consumer can afford and what the cars actually cost, then there’s little-to-no incentive for those car companies to compete with one another on pricing. That may be creating conditions for prices to further balloon.
Nonetheless, the Central Bank agrees with the BPFI and Bank of Ireland that, as of now, there is no serious danger of car loans upending the Irish economy. A Central Bank spokesperson told The Irish Times: “While auto finance comprises a material but non-majority portion of the total consumer finance market, our current assessment is that the risks in this segment are contained and the amounts outstanding are relatively small compared to other lending sectors."
Basically, Ireland’s car market is too small for even the rapidly increasing loan amounts to present any serious macroeconomic issue.
However, the situation in the US market is far less rosy, where, according to Experian, car loan debt has reached $1.5 trillion.
That’s only around a tenth of the total mortgage debt, defaults on which triggered the 2008 collapse. However, a large number of car-loan defaults could have the potential to cause global financial markets to tremble, at the very least. With Ireland so badly exposed to global trade winds and whims, that’s something that ought to make us wary.
