Consumer watchdog sounds alarm on extended auto loans

[GS8]

And now for a 'no shit Sherlock' article

From CBC

Canadians are increasingly buying too much car and paying for it with loans that extend for six, seven and eight years, according to a federal consumer watchdog.

For many, that means high interest charges that increase the cost of the car and put consumers at risk of credit default, said Lucie Tedesco, commissioner of the Financial Consumer Agency of Canada.

Canadians brought home 1.9 million new vehicles in 2015, a record sales number.

But those record sales, as well as the trend to larger SUVs and pickup trucks, have been financed with extended auto loans, the FCAC said in a research report issued Tuesday.

The traditional term for auto loans is about five years.

But since 2010, consumers have increasingly opted for six, seven and eight-year loans.

Buying more car or truck

"The monthly payments on extended-term loans for more expensive vehicles are often roughly the same as those for economy-class vehicles financed over conventional terms," FCAC said in its report.

So consumers can buy more car or truck if they extend payments over a longer period.

Long-term car loans constitute approximately 60 per cent of the car loan portfolios of Canada's largest financial institutions, FCAC found.

And because autos depreciate in value so quickly, the outstanding balance on the loan outstrips the value of the vehicle, often for several years. This is called negative equity.

When consumers have negative equity in the car and want to trade it in for something newer, they may face tighter credit terms and higher borrowing costs. FCAC said this is not sustainable, for either the consumers or the lenders.

"Consumers put themselves in the position of having to roll the debt owing on the long-term loan into the loan for the purchase of the new vehicle, thereby potentially stepping onto an auto-debt treadmill," Tedesco warns.

She urged consumers to educate themselves about the full interest costs they would pay during the length of the loan and to consider their own overall debt costs each month.

The Canadian Automobile Dealers' Association responded to the report by agreeing that loan terms are longer, but pointing out the low default rate on auto loans.

Dealership association responds

"Our low-rate environment means much auto debt is financed at zero per cent. In that context, it is a fully rational choice on the part of the consumer to extend the length of the loan," CADA economist Michael Hatch said in an email statement.

The association also took issue with parts of the FCAC report that describe how dealers act as intermediaries between the consumer and the lender, presenting loans to consumers from lenders that offer a percentage to the dealership.

The value of the auto loan financing market has doubled to $120 billion annually in the past eight years and it can be a very competitive business.

But CADA said dealers arrange for the best financing options for their customers and they always have options.

FCAC points to the rise of non-prime lending — loans to people who would not otherwise get credit.

Approximately one-quarter of Canada's auto finance market is non-prime, meaning very high borrowing costs. The people affected are often younger consumers or new Canadians.

Here is a link to the research report

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I know people who have done this. They didn't want to listen.

[Jmac]

Ditto

I have never had an auto loan. Every car I've ever bought has been purchased with my own money.

Like I tell my friends who ask me for advice, the thing better damn well be worth more than you owe on it when it gets written off or traded in, as mentioned in the article (negative equity).

One of my friends, back when we just got out of high school, bought a new Pontiac Sunfire, financed it with no money down over the longest term possible. He wrote it off a couple of years later and, given the depreciation and accumulated interest, he still owed several thousand on the loan after the ICBC settlement. He was forced to take out another loan ($10k) to pay off the remaining debt and purchase another vehicle (an early 90s truck). Basically just got himself into huge financial trouble because he had the loan payments of a new car paired with the reliability and ownership costs of a 15-year-old Chevy truck (which was a complete POS).

[underscore]

I'm tempted to finance a vehicle every so often, but then I remember my friend who financed a used car a couple years back and has effectively only paid off the taxes and fees so far. Now he wants to sell it but the car is worth less than what he still has owning on it.

[StanleyR]

I usually am tempted to buy another car after a year or two!

Thank God I don't buy new cars

[GabAlmighty]

Brb, checking the fine print on my new car replacement policy...

[noclue]

only fools fall for that low/no interest rate advertisement. You lose more compared to cash incentives long run.

Which leads to another problem, people using their home equity (since house prices gone up) to buy cars using "cash." I hear HELOC debts are very high too.

[JDMDreams]

Man I see all these people who have car payments bounce and icbc bounce and somehow they still feel entitled that they need a new car

[BoostedBB6]

If your smart you dont buy used. Let other people take the hit of massive depreciation and you pick it up after when its a far more reasonable price.

Or go into debt for no good reason and stay behind the 8 ball just so you can drive new.....working with new cars I see it all the time. People debating if they can afford the lowest payment over 8 years......just stupid.

I have used my LOC to purchase cars before but then there paid of in the matter of a couple months so the interest is so low it really is insignificant.

[white rocket]

It's almost a catch 22. Non-Prime clients are pretty short-sighted from what I've seen. Dangle a set of keys in front of them and they'll sign anything. They are payment driven which is why the marketing dynamic is built the way it is. "For less than a cup of coffee per day you can have this........." Little do they realize that the term and interest rate buries them right from day one. Combine this with pushy and flat out lying salesman and you have a recipe for disaster. Sales is sales and they are there to make money so the "truth" can get clouded.

Classic pitch: Take this car at a high interest rate with the guarantee that you can refinance in 1 year at a lower rate. What isn't mentioned is that you need to return that car, take a massive depreciation hit, bury that negative equity into a new car deal and off you go. Now you owe $30K+ on something that's worth $20K on day one. Yeah, good move

For prime clients, they have more options available to them and are usually in a better financial position. Low interest HELOC's with open payback terms are an easy way to keep your running capital free and not be subject to a vehicle financeers terms of payback. Sometimes a 0% loan makes sense if your income is stable. You usually end up paying full price for the car though. Cash deals with no financing needed boasts the best chance at negotiating a better price. Some people would just rather have a monthly payment and swap cars every 3 to 4 years. Nothing wong with that if the money you are borrowing is essentially free. It's a loan with interest and clients extending the term to save a few bucks per month that can create the problem. Short-sightedness in full effect. But again, it really depends on what means more to you. Monthly expense or total cash paid overall. Usually the latter is a concern for financially stable people while the monthly payment is the selling point for non-prime clients.

It's a cyclical business. Lenders get into non-prime lending, enjoy the high interest rate profits, then start to get burned by clients that DGAF, and begin experiencing losses on those assets once repossessed, then they back out for a while.

[mos_skeeto]

I don't think there's a problem with financing a new car or buying used. Personally, even with zero percent, I would never go above 4 years for financing a car (5 if it was my dream car). If you had to go 6+ to afford it, you probably cannot afford it.

[tiger_handheld]

one way to fix this kind of crap is to educate grade 10's useful math like 'how interest rates work' not friken filling out a 100 page binder about what careers are best for you based on personality or when two trains will meet if one train leaves new york and the other leaves LA ...

[q0192837465]

Originally Posted by tiger_handheld

one way to fix this kind of crap is to educate grade 10's useful math like 'how interest rates work' not friken filling out a 100 page binder about what careers are best for you based on personality or when two trains will meet if one train leaves new york and the other leaves LA ...

QFT man. The number of ppl without basic finance knowledge is too damn high.

[underscore]

Originally Posted by tiger_handheld

one way to fix this kind of crap is to educate grade 10's useful math like 'how interest rates work' not friken filling out a 100 page binder about what careers are best for you based on personality or when two trains will meet if one train leaves new york and the other leaves LA ...

A valid idea, but even if they did most people would have forgotten 5 or so years later when they go to finance a car. Maybe instead of blaming the education system we should hold grown ass adults responsible for being too lazy to learn how the math works on the loan for tens of thousands of dollars that they're going to be paying for over the next several years.

[bcuzracecarz]

Buying a new car at zero percent is totally fine if, like said above, you are stable and just plain enjoy buying a new car every once and a while. Especially since once it's paid off it's yours to do what you will (trade up to another new car using that equity or keep a nice 4-5 year old car with no payments). It's the 8 year long, diesel, dually, truck loans to a young kid that doesn't even know why he is buying a diesel or dually in the first place (just cuz his friends have said it's cooler than a used Taco) that really jars me. *see Alberta used truck ads, full of ass backwards car loans from guys trying to get out