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Long-term car loans come with lower payments, but higher costs

Overview

Published: 06/21/2016

by Arielle Duke

Use FCAC's budget calculator to help plan your next car purchase. You can also visit ItPaysToKnow.gc.ca for more information.

Long-term car loans offer Canadians a reasonably priced gateway into the car market, but that road may be full of financial potholes for those who use it to buy more car than they can afford.

Over the past eight years, Canada's car-finance market has nearly doubled in size. This increase is, in great part, due to the rise in long-term loans with repayment terms of 72, 84 and 96 months (six to eight years), compared to roughly 60 months (five years) for more traditional loans.

The longer the term, the lower the payments. So longer terms can help you manage monthly costs, but you will pay more interest by the time you clear the debt. Too often, consumers and car dealers who help organize finance for their clients focus on the monthly payment and not on the overall cost, including interest, insurance and maintenance over the life of the loan.

By stretching and reducing payments, long-term loans may encourage you to buy a car you otherwise could not afford, and that can lead to trouble down the road.

“Be careful about getting overextended,” notes Lucie Tedesco, commissioner of the Financial Consumer Agency of Canada (FCAC).

“Let's say you have a seven-year loan and, like many, you want to trade in your car after four years. You will still have three years of payments left. After the trade-in—and if your lender agrees—you can add what's left of that debt into a new loan for another car. That means a bigger debt, possibly at a higher interest rate, and that can put you on a dangerous debt treadmill.

“If you don't want to keep paying for a car you're no longer driving, be sure you understand the implications of a long-term car loan before you sign on the dotted line.”

Long-term loans are especially costly for consumers with a poor credit score or no credit history as they may be required to pay higher interest rates.

Consumer advocates believe that long-term car loans render buyers more vulnerable to unforeseen shocks–such as a serious illness, job loss or an accident in which the car is a write-off years before the loan is paid.

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