Canadians are driving into fast debt with slow repayment car loans. Taking advantage of low interest rates and small-to-zero down payments, they are buying cars in record numbers.
According to an August 2014 Financial Post article, rather than four to five years, many of us are taking car loans out for periods of five to eight years. While this may lower monthly payments, it leaves us in debt longer and puts off the time the vehicle’s worth is greater than the debt.
An eight-year loan also doesn’t make a lot sense considering that Canadians tend to only own their cars on average for eight or nine years. What happens to that magic period of relief when you own your car outright, with no loan payments to make?
As a result of this bad practice, credit counselling agencies report they are meeting an increasing number of people who need advice because of car loans. Long-duration loans tend to encourage us to take on more debt than we can easily handle.
The problem also extends to auto leases. Often drivers go over their allotted mileage and, when facing large bills as their leases expire, they tend to convert the leases into loans with extended repayment terms.
So when buying a car, it’s a better strategy to stick to a maximum repayment term of five years, with a minimum 20% down payment. A long-term loan for a depreciating asset just doesn’t make sense.
If you do feel stuck in this kind of situation, on a never-ending treadmill of payments that you can’t get off, call us at Richard Killen & Associates Ltd. We will have some answers for you. It’s what we do. And the consultation is free.