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Why Car Buyers with Poor Credit Should Avoid Long-Term Loans

Experts are worried about a recent trend among Canadian car buyers. It appears that a lot of consumers are taking out auto loans with terms of 72 months (six years) or more. They're doing this to reduce their monthly payments. But they may not realize that taking on long-term loans will cost them more down the road.

And if they have less than perfect credit, they could end up paying thousands more by signing on to a six-, seven-, eight- or even nine-year car loan. Yes, according to the Government of Canada website (, it is now possible to finance a vehicle for a full 108 months.

How Interest Charges Can Make Long-Term Loans Expensive

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2016 was a record-breaking year for Canada in terms of new car and truck sales. With nearly 1.9 million vehicles sold, automakers have been celebrating. However, finance experts have been less enthusiastic.

According to the Financial Consumer Agency of Canada (FCAC), the average auto loan term for 2016 was 72 months. This is way up from 2010, when a "normal" loan term was around 65 months. And, sure, the acceptance of long-term loans has allowed buyers to shrink their monthly payments. But, as deputy commissioner at the FCAC, Brigitte Goulard, is quick to point out, this perk comes at a price. She states:

"By extending the term of a car loan to seven or eight years, it will drop the monthly payment, but borrowers will pay more in interest."

This is absolutely true. Of course, for vehicle shoppers who qualify for interest rates of three per cent or less, it won't make a huge difference in what they pay. Sure, loan term extension will still result in the buyer having to pay more in interest charges. But the expense probably won't be devastating.

On the other hand, a consumer with credit issues may face an interest rate of 12 per cent or more. So, if this buyer takes out a long-term loan on a car, they could end up paying a small fortune in interest charges. It is also very likely that they will be faced with negative equity in the vehicle for quite some time.

How Negative Equity Adds to the Inconvenience of Long-Term Loans

Interestingly enough, a recent study shows that the average Canadian car buyer only plans to keep their vehicle for about four years. So, if a consumer is following the long-term loan trend, they will probably want to trade their car in before it is paid off. But if, at this point in time, they owe more on their loan than what the car is worth, they have negative equity.

Unfortunately, a borrower with a low credit score is typically not allowed to trade in a car with negative equity. In this case, they would have to pay the difference between the vehicle's trade-in value and what they owe the lender. Again, with the high interest rates normally assigned to credit-challenged car buyers, this difference could be thousands of dollars. And this is just to get out of a vehicle that they no longer want to drive.

Thinking Ahead and Buying the Car that You Can Realistically Afford

Goulard wants to caution car shoppers against thinking in terms of monthly payments only, saying:

"You walk into a dealer and sometimes the first question they'll ask you is how much you can afford monthly."

This is potentially a dangerous way to start the buying process. You may not realistically be able to afford a $40,000 vehicle. However, if the loan is spread out far enough, the monthly payments might seem affordable. If the interest rate is on the higher end, this will make a car that's already too expensive even pricier in the long run.

Instead, it's better to plan out a viable car buying budget ahead of time. So, if you know that you'll be dealing with a higher interest rate, looking at vehicles with lower selling prices is a smart move. For example, if you need a bigger vehicle for a large family, a recent model used SUV might be a good option. Or, if you're a single driver who can get by with a small car, you may be able to comfortably purchase a new and affordable subcompact car.

Easier Auto Financing for Buyers with Imperfect Credit

If your top concern is getting financed to purchase the vehicle you need, Canada Auto Loan can help. Whether you have poor credit or no credit, we'll assist you with your car buying experience. How? We'll match you with a local dealership that can work with unique credit situations.

Also, our service is free and comes with no obligations, so you have nothing to lose. Go ahead and fill out our simple and secure auto loan request to get started today.