Tag Archives: stretching financing

Eight Year Car Loans? Yikes!

The average Canadian car loan is now 71 months. That’s up almost a full year from 2008. It’s pretty clear that prices go up, but people’s budget doesn’t grow. So what’s the solution? Stretch that loan out. It used to be four years, which is reasonable financing. Then it became seven years at almost doubles the interest. But most people don’t care. They just want to know what the payment is.

To make the payment fit even better, the last year has seen a huge increase in advertisements for bi weekly payments. Want to see a smaller payment? That’ll do it. Oh, not in reality because you’re paying twice a month – but the illusion of lower payments is magic that does trick a ton of buyers. When the average vehicle payment hit $450 a month, that’s a big number to think about. OK, how about $225? Will that make you feel better? Unfortunately, it’s still $450 a month – it just sounds better – it doesn’t cost any less per month.

You can now get eight year financing – whether you prefer not to know that by just taking bi weekly payments or not – it’s insane for your budget and debt load. Your rough break-even point where you’ll owe what it’s worth is five years. If you could get a 50-year mortgage, it’d be stupid, but you know historically that your home will increase about 5% a year. Yes, there’ll be corrections, but over the long term, it will go up. With a vehicle, it’s a 100% guarantee it’ll go down in value every single day. So you have to pay enough a month to keep up with the depreciation. Whether you like it or not you gotta pay for what you use.

According to industry forecasters, Canadian sales of 1.7 million a year should continue to increase because millions of people are shrinking their buying cycle. In other words, they’re trading more often. But at the same time, they’re stretching the length of their loans, and that’s a deadly combination.

Longer financing and wanting to trade quicker means huge numbers will be upside down and owe more than their trade is worth. According to J.D. Powers, that’s already the case for more than a third of all buyers.

If you have the cash to buy a new vehicle – congratulations. For the rest of the world, spend the $20 for the It’s Your Money book. 15 minutes reading the car buying chapter will turn your $20 investment in the book into $1,000 to $4,000 in savings.

Just remember: Broke people ask: How much a month. Wealthy people ask what the price is.