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Why You Should Avoid Long Term Car Loans

If you need to finance a vehicle but have damaged credit, you need to be wary of a long loan term. Canadians have recently started to take out auto loans that have grown longer and longer in length. The root of the problem lies with the common consumer practice of extending out a loan in order to make the monthly payments as affordable as possible.

Long Term Car Loans in Canada

It's a fact. Canadians have been taking out longer and longer auto loans in order to accommodate their vehicle needs. Traditionally, Canadian car loans have been somewhere between three and five years long on average. This is no longer the case.

In 2009:

  • Less than 20 per cent of auto loans were for longer than 5 years
  • The average length of an auto loan stood at about 63 months


  • December 2014: average length of an auto loan was 74 months
  • April 2015: Loans of 6 years or longer accounted for 66 per cent of auto loans

Why is this happening? Most analysts agree that Canadians are buying more car than they can afford. But when a consumer sees a low monthly payment attached to their longer loan, all of their problems seem to disappear.

Stop Thinking in Terms of Monthly Payments

Long Term Car Loans

Meet my imaginary example Michael. Michael had okay credit, not great, and a steady monthly income, but still wanted to finance a truck. He decided to do so on a seven-year term instead of the more typical five-year period. After all, that made his monthly payment decidedly cheaper. Six years later, Michael crunches the numbers and realizes he's paid thousands of dollars more than the amount of the loan he took out. How did that happen?

The problem was that Michael made the monthly payment his number one concern. For some reason, that has become the norm with car buyers when they should really only be concerned with the total cost of financing a vehicle.

Not to mention, seven years is a long, long time. It's impossible to predict what your job and income situation will be that far into the future. You may not be able to afford the payment amount you once agreed to.

Also, you could grow to be disillusioned with your vehicle and want something else. The problem is, the longer the loan term, the longer it takes to build equity in a vehicle. If you owe more on the loan than the car is worth, selling it becomes very messy.

Remaining Realistic When You Have Damaged Credit

Car buying is a delicate process, especially when your credit is bruised. We here at Canada Auto Loan caution buyers with less than perfect credit to remain realistic with their next car purchase.

We can connect you to the dealer who can get you approved if you meet their requirements, but you need to be responsible when it comes to your finances. First and foremost, that means you need to think in terms of total costs, not monthly payments. Also, you should:

  • Finance a vehicle on the shortest term you can comfortably afford, preferably 48 months or less
  • Prepare a down payment, in the form of cash and/or a trade-in, of at least 10-20%
  • Choose a car with a payment that falls between 10-15% of your monthly income (the lower the better)

You can check out our approval amount calculator to get a better understanding of where you stand financially.

When You Are Ready To Buy

We here at Canada Auto Loan can help you get connected to a dealership that can get you approved for an auto loan, regardless of your credit situation. Fill out our secure and obligation-free online application to get the process started.