I want to use the automated windows back-up function to create regular system images. C drive is the place where i have the most space, but something about it seems like a bad idea.
Backing up your system on the same hard disk is a bad idea. When your HDD gets corrupted for some reason, you won't be able to access your backups if you have put your backups in it. You should save your backups on a separate disk. Never put all your eggs in one basket.