Canadians are increasingly turning to finance loans to pay for their vehicles. Moreover, customers are taking longer term loans to cover the costs. The majority of motorists are agreeing 84-month finance terms for cars, CBC News reports.
While Canadians are happy to become indebted for longer, the car market is enjoying a boom. Lower monthly payments mean more people are purchasing new vehicles, with volume numbers set to grow through 2018.
Traditionally, the go-to loan term for a vehicle in Canada was five years. Now, customers are taking advantage of low interest rates and long-term loans to stretch the borrowing period to eight years. It’s arguably a win-win for customer and lenders as the former gets smaller manageable monthly payments, and the latter receives a larger lump sum through interest over 84 months.
Speaking to CBC News, auto industry expert Robert Karwel says the longer terms allow consumers to buy more expensive vehicles. “People are buying more expensive cars, and that’s been facilitated by [this type of] financing because you can spread the payment over long enough of a time,” Karwel says.
Not all good news
While the benefits are obvious, there are dangers with taking finance loans over a longer period for lower monthly payments. Customers are left paying the cost for high interest over a long-term lending period, while lenders are happy to recoup the cost. Indeed, depending on factors such as credit rating, payment history, and the vehicle being purchased, interest can sometimes nearly match the MSRP of the car.
It is also worth pointing out that lenders will often require a certain level of auto insurance, meaning consumers will also pay more in that regard.
Arguably the biggest problem with long term car financing is the so-called underwater trade-ins. This is where the vehicle value has decreased so much through the payment period that it can affect worthiness for future finance loans and other forms of credit.