A recent report issued by Lucie Tedesco, Commissioner of the Financial Consumer Agency of Canada shows a "worrisome" growing trend of long-term auto loans of more than six years.
Long term auto loans
According to Lucie Tedesco, Commissioner, Financial Consumer Agency of Canada, "Recent trends in extended-term car loans have raised several concerns. Consumers must carefully examine their needs and their financial situation to ensure they can repay their car loans without undue strain, and with a full appreciation of the total interest charges and value of the car throughout the loan period."
Quick facts found in the report
Here are some facts the report uncovered:
- Owing in part to the allure of the lower monthly payments featured by long-term car loans, Canada's auto finance market has nearly doubled in the last eight years.
- In 2015, the average new car loan had a term longer than 72 months, up from approximately 65 months in 2010.
- Long-term car loans constitute approximately 60 per cent of the car loan portfolios of Canada's largest financial institutions.
- Despite opting for long-term car loans, many consumers continue to change their vehicles every four years or so, while still owing on their previous vehicle. The outstanding balance on the previous loan is typically rolled into the loan for the purchase of the new vehicle.
- Total transaction costs for new vehicles are rising more than twice as fast as average monthly payments, as a result of longer average loan terms.
- The percentage of consumers in negative equity positions trading their cars has risen 50 per cent over the past five years: from 20 per cent in 2010 to 30 per cent in 2015.
- Auto dealers typically solicit bids from several lenders for the same consumer/transaction. These lenders typically offer dealers a commission or other incentives to get their business and consumers may not be presented with competitive offers.
The focus should not be on the payment
According to Ms. Tedesco, "Consumers and auto dealers tend to focus on the monthly loan payments required for a car purchase. Few take issues such as negative equity into account when choosing between different car loan terms. This is one of the reasons why FCAC will work with stakeholders to make sure that consumers are getting enough information and know which questions to ask."
The problem is made worse for credit-challenged borrowers. The higher interest rates they're charged mean that these consumers with long-term loans will be upside down longer, while paying even more in interest charges.
Here's what these buyers should consider if they need a car loan:
- Choose the most affordable vehicle possible with a payment that is no more than 10% to 15% of their gross monthly income (the lower the better)
- Keep the loan term as short as possible – even to the point of paying a little extra on the loan amount each month to further reduce interest charges
- The loan-to-value (LTV) ratio is always important. Aside from any new car rebates or dealer cash, a down payment over and above the 10 per cent minimum (15% or more) will not only reduce the interest charges, but also improve the chances for an approval.
The bottom line
The trend towards long-term loans is not a good one for credit-challenged Canadian borrowers. These consumers should keep the amount financed as low as possible and the length of the loan as short as they can manage for their best chances at successfully completing an auto loan.
One more tip: If you have credit issues, we want you to know that you can get a reliable and affordable vehicle as well as the opportunity to put your credit back on track with help from Canada Auto Loan. We can connect you with a dealer in your area who is qualified to work with a broad range of credit situations.
Our service is free, our process is fast, and you are under no obligation to buy when you fill out our simple and secure online application. Get started now.