Used Cars Under $500, Long-term loans: The fuel that’s powering Canadian car sales

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Used Cars Under $500 – This story is part of a series that we call Debt State that sees the state of consumer debt in Canada. Look for more coverage in the coming days, including mortgages and credit card debt. Canadians buy more cars than before, but a closer look reveals that they took longer and longer to pay them too.

More than half of all new car loans are currently financed for 84 months – seven years – or longer. Industry standards are used to amortize car loans for 60 months – five years – but because low interest rates settle in, the payment period begins to stretch longer and longer to make the lowest monthly payments possible.

Used Cars Under $500

Longer terms allow creditors to make more money in paying interest on each car loan.

Car loan interest rates can range from zero percent to high single digits, depending on the brand and model, time of year and length of loan.

J.D. market research company Power Inc. collect sales data from more than 1,200 Canadian car dealers throughout the country, and have noticed disturbing trends.

In short, “long-term financing has exploded in Canada,” said automotive expert Robert Karwel. At one point earlier this year, 55 percent of all new car loans were at least 84 months.

That could be more than seven years to pay off depreciating assets, and that is a piece of the puzzle of Canada’s growing debt.

That number has since dropped slightly to 51 percent as of September, Karwel said, but for the purpose of comparing less than 10 percent of American car loans pulled out during that period.

Most are fixed rate loans, but even so, if Canada is five times more likely than Americans to have long-term car loans, they are five times more vulnerable at the bottom line because of the costs of all other forms of their debt. creeping higher.

“People buy more expensive cars, and that has been facilitated by this type of financing, because you can spread the payment for quite a long time,” Karwel said.

The appeal for car buyers is clear.

The average price of new cars in Canada last year was just over $ 33,000 last year. If you pay cash up front, you might get a small amount of that in terms of dealer incentives and instant discounts.

But if you finance it for more than seven years or more, it’s not difficult to get a monthly payment of less than $ 500 per month, and even a simple advance payment will result in a much lower payment.

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Squeezing the same car into short-term loans saves money in the end but can add hundreds of dollars to monthly payments.

Which is a big reason why B.C. Jakky McDonald residents jumped at the opportunity to get an 84-month loan when he bought the new Kia Forte earlier this year.

The 24-year-old was not in a position to pay cash up front, so he knew he would finance.

Based on what the dealer offered, he left with a seven-year payment plan, but the seller gave him an additional invitation that he couldn’t resist. When checking his credit history, the salesman realized that he had around $ 4,500 in student loans in his file. He suggested that he roll the debt into a new zero percent interest car loan.

“He said, you might want to consider taking another debt that you might have that has an interest in it, you know, for this because it will save you money in the long run,” he reminded him by saying.

He checked the good print, and finally did it. Six months later, he said he would make the same call in an instant. In McDonald’s case, the plan depends on zero percent on loans.

True, he might miss some other incentives if he pays cash up front, but refinances almost $ 5,000 of student loan debt in one movement working for him.

“I chose for $ 4,500 money back and then they wrote me a check for it,” he said. “And I just go and put it on my loan.”

The case clearly illustrates the point of sale for consumers of some of these loans – but it’s not difficult to get the bottom side.

Experts say that one of the biggest risks of the loan is that when the loan period reaches seven eight or even nine years, it is not uncommon for borrowers to still owe more to the car than its value, when they come to need another car. within a few years.

In financial language, which is known as having negative equity, but in layman’s terms it feels a bit like having your finances upside down and underwater.

JD. The power number shows that more than 30 percent of Canadians who trade with cars owe more to the car than its value.

More often than not, the gap will be rolled into new car loans in the form of new debt, which expands the payment plan further and puts more borrowers in debt when they need to do it again in the next few years. And the cycle continues. And continue. The longer the loan, the more likely it is to present a problem on the telephone.

“You only spread the same risk over a longer period of time,” said Matt Fabian, research director at the TransUnion credit reporting company.

While Fabian noted that delinquency rates for car loans are still low, long-term car loans are a growing part of Canada’s debt picture – mainly because Canadians buy bigger and more expensive cars.

Most car loans have a fixed interest rate, a fact that makes them somewhat insured from a future increase in interest rates. But that hides the fact that increases in other places can even make payment of cars difficult to come every month.

“Car loan payments don’t increase, but if you have a variable interest mortgage and credit line, that’s right,” Fabian said.

Benjamin Tal economist at CIBC agrees that car loans are really a problem in as much as they fit in with Canada’s overall debt burden.

But he was especially worried about people with negative equity – who owed more than their car, even after years of paying it off.

Because consistently doing that means “you become more vulnerable to a higher risk of interest rates,” as he said.

That might sound gloomy, but fortunately, J.D. Power’s Karwel says there is an easy solution to this problem.

“At least for consumers, there is a safety valve for all this … and a safety valve … just keep your car. If you finance for 84 months, keep your car for 84 months and this problem is gone.”

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