By on July 23, 2012

Canadians have some of the highest household debt levels in the world, thanks to cheap mortgages and home equity credit lines. And car loans are next.

Canadian household debt levels are estimated at 152 percent of  income, and long-term loans with cheap interest rates (or 0 percent interest) are cropping up all over the place. A look to Canadian manufacturer websites shows that most of the big players are offering some kind of 0 percent. A  J.D Power survey cited by The Globe and Mail claims that more than half of Canadians financing a new car are taking out loans with terms longer than 6 years. That figure was around 14 percent just five years ago.

Typically, a 7 year term can be had interest-free, which makes it attractive for families or individuals burdened with exorbitant housing costs. While consumers are stuck with a long loan term (often well past a car’s warranty period) the lower monthly payments are an attractive proposition. The collapse of leasing, which accounted for 40 percent of purchases before the recession (compared to just 17 percent over the past year), is also cited as a cause for the increase in financing.

Of course, this is all normal, and real estate in major cities will continue on its unstoppable rise upward and there will never be a shortage of foreign investors looking to park their money in Canada. Ever. Which means interest rates will always stay low and nobody will ever have to worry about living beyond our means.

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73 Comments on “Long-Term Car Loans Rising In Popularity North Of The Border...”


  • avatar
    jmymlr

    Thinking in terms of the Time Value of Money (TVM), how is a 7 (or 8) year 0% loan for something you’re going to buy anyway a bad idea? If you want to pay down debt, you start with your highest interest rate.

    • 0 avatar
      djsyndrome

      Because unless you put a fair amount of money down, you will be upside-down on the loan for a much longer term. If the car is totaled, without any kind of supplemental (gap) coverage you are on the hook for the difference.

      At least that’s how it is here in America. Is Canada any different?

      • 0 avatar
        bikegoesbaa

        ” If the car is totaled, without any kind of supplemental (gap) coverage you are on the hook for the difference.”

        In this case, you’re not actually out any more money than you would be if you paid more upfront.

        You are essentially “on the hook” for (Purchase price)-(Replacement value of car at time of crash).

        The amount of money you put down does not directly impact either of these variables, so the actual cost to you stays the same regardless of how much you pay upfront.

        The only question is one of certainty and convenience, and that’s only an issue if you don’t have a few thousand dollars on hand to make up the “gap” in the unlikely event of a total loss. If you don’t, then you probably shouldn’t be buying a new car.

    • 0 avatar
      bikegoesbaa

      Agreed.

      If you were going to buy the car anyway and it is something you can afford, why not take the longest 0% term available.

      Would you rather pay somebody back with “today dollars” or the same numerical amount of “4 years from now dollars”?

      There’s nothing saying that you can’t pay the loan back faster if you want, but a long term 0% interest scheme gives you the purchaser both more flexibility and the benefit of paying your debt off with what will likely by more-inflated less-valuable dollars later on.

    • 0 avatar
      ClutchCarGo

      Someone has to bear the cost of 0% financing. In this case it’s probably the dealer (unless it’s a “gotcha” loan where the 0% jumps up dramatically if you miss a payment). In many cases, the buyer has a choice of 0% or a rebate. Taking the rebate can be a better deal for a buyer with cash on hand or access to cheap credit via credit unions, etc. Even without a rebate, a buyer can probably negotiate a lower purchase price if they skip the 0%. These sales incentive rates are not like other financing plans that are profit centers for the dealer.

      • 0 avatar
        Pch101

        “Someone has to bear the cost of 0% financing. In this case it’s probably the dealer”

        That cost is always eaten by the captive finance company that is providing the free money, i.e. the automaker.

        In this case, I would assume that part of it is intended to keep Canadian consumers from traveling south of the border in order to purchase their cars. Canadians have to pay a premium for cars, in part to offset exchange rate risk. But that premium isn’t adjusted enough to compensate for the current relative strength of the Canadian dollar.

      • 0 avatar
        Sinistermisterman

        Pch101
        Buying south of the border isn’t always an option. A large number of manufacturers do not honour their warranty north of the border.

        http://www.ucanimport.com/Warranty_Policies.aspx

        Not to mention all the import tax and duty you have to pay the Registrar of Imported Vehicles…

      • 0 avatar
        Pch101

        The import duty is based upon the value of the car. It’s essentially the same as would be the GST that you’d pay at home, regardless, so it’s a wash.

        Some manufacturers honor warranties, others are less inclined. For many Canadians who live close to the border, this is a problem that can be managed.

        The point remains that Canadian dealers find themselves competing indirectly with American dealers, and the automakers want to support their Canadian price points. Hence, they need to subsidize their Canadian sales with some consideration for what is going on with the exchange rate.

        The alternatives to cheap financing are cash back, leasing or price reductions. Nobody wants to do the latter — a later decline in the Canadian dollar would force them to jack up prices, which would just upset their Canadian customers. (Consumers tend to demand discounts when their money gives them more buying power, but are unhappy with increases when the exchange rate moves against them.)

      • 0 avatar
        Sinistermisterman

        Pch101
        “The import duty is based upon the value of the car. It’s essentially the same as would be the GST that you’d pay at home, regardless, so it’s a wash.”
        True, but unless you’re buying from a state with no sales tax, you’re going to pay sales tax and then the import duty. Also, I technically live close to the border, but having to do a 100 mile round trip to the nearest dealer to get serviced, with border wait times and associated hassle, would soon make anyone regret any cash savings they made in the initial purchase.
        With that in mind, I’m not so sure many Canadian car dealers do find themselves competing with their US counterparts in anything but little things like this 0% financing. I’ve not really seen any incentives at Canadian dealerships which you wouldn’t see at a US dealership. After speaking with my buddy who works at a local Chrysler dealership, he says he has never had anyone come up and say “Hey, I can buy the same car for X bucks less in the US.”

      • 0 avatar
        Pch101

        “unless you’re buying from a state with no sales tax, you’re going to pay sales tax”

        No, that isn’t necessarily true. Sales tax isn’t always levied against cars that are sold to out-of-state buyers.

      • 0 avatar
        carbiz

        Very few people would know (let alone remember) that there was a time that GM subsidized many vehicles, mostly trucks, in Canada. When we sold a Suburban, Tahoe or high end pickup and the purchaser wanted to pay cash, there was an 800 number (later followed by a website) that we would have to check the purchaser’s name against known exporters. If a Canadian spec Suburban ended up on a street in Vermont a month later, there was hell to pay at the dealer level.
        Canadians wouldn’t know about that, but prefer to bitch about how they are ‘ripped off’ on purchase prices today.

        And GM pays for the 0%. It comes out of their marketing money. They could spend the money on flashy brochures, glamorous TV ads, or to ‘write down’ the interest on the purchase: whatever they deem at the time will move the most metal.

  • avatar
    Kendahl

    As long as you don’t use it to move into a more expensive vehicle you couldn’t previously afford, a long term low interest loan beats a short term high interest loan.

    As far as the “unstoppable rise” in real estate prices is concerned, it sounds like a good time to sell your property, bank the proceeds for a couple of years, then buy it back at 70 cents on the dollar.

  • avatar
    bball40dtw

    48 month lease? Yuck.

    • 0 avatar
      carbiz

      The old 48 month lease payment equals 72 months at zero, almost to the penny. With normal mileage, wear and tear, virtually all vehicles would be worth as a trade in what their outstanding loan balance would be at 48 months. Essentially, the consumer can ‘walk away’ either way. When you factor in the tax savings on the trade in value of the vehicle, you can view the 72 months at 0% as a replacement for the old 48 month lease.
      However, there is one HUGE catch: under the terms of GM’s old Smartlease (axed in Canada when GMAC had to become a bank to qualify for ‘bail out’ money), if you had an accident, the depreciation did not count against the lessee. And in all cases, if the leased vehicle was totaled, GMAC ate it. Those were huge advantages of leasing over financing.
      My poor buggy is less than 5 years old, but has had the front fascia replaced twice and the hood (a Deville decided to sit on the front of my car at the top of the ramp to my underground garage as it backed up the steep incline and its mirrors stared off into space.) I will be driving this car until it dissolves because with two whacks on its record, the ‘hit’ I will take at trade in is tremendous.
      I should have leased it.

      • 0 avatar
        rodface

        Do you know if this lessor-favoring arrangement in the event of an accident is used by any other manufacturers?

        I’m at the point where I want a new (to me) car, and have just seen the number of miles I drive per month go down substantially, to the point where I could stay within the confines of the annual mileage limits of most leases. I already carry full coverage insurance and don’t want to keep a car for more than 3-4 years (i.e. inside warranty period). I seem to be the ideal case for a lease, and not losing a load of money off the car’s sticker in case of an accident would only sweeten the deal…

  • avatar
    Sinistermisterman

    I’m glad someone else is looking at the current situation in Canada and thinks that it isn’t sustainable in the long term.
    $300k+ for a 300sqft bachelor apartment in downtown Vancouver? I mean come on…
    The world has had plenty of examples over the past few years of bubbles popping and people struggling with the aftermath of excessive debt loads, reduced income and reduced worth of assets.
    I’m pretty new to Canada, so someone correct me if I’m wrong, but is it right that unlike the US, you can’t just walk away from a mortgage that is underwater in Canada?

    • 0 avatar
      th009

      “I’m pretty new to Canada, so someone correct me if I’m wrong, but is it right that unlike the US, you can’t just walk away from a mortgage that is underwater in Canada?”

      You are correct. Those are non-recourse mortgages, and you can’t get one like that in Canada — this certainly discourages defaults.

      http://en.wikipedia.org/wiki/Nonrecourse_debt

      • 0 avatar
        Deaks2

        Good point. However, Alberta has non-recourse mortgages: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/07/mortgage-defaults.html

        Funny thing is though, unlike the USA, in Alberta people didn’t walk away from their houses…

      • 0 avatar
        jmo

        “Funny thing is though, unlike the USA, in Alberta people didn’t walk away from their houses…”

        When was Alberta’s housing crash? Back in the early 80′s when oil prices crashed?

      • 0 avatar
        Deaks2

        As per the link I posted, it was in 1985.

    • 0 avatar
      Conslaw

      Sinistermisterman, you hit the nail on the head – a trend to finance the cars longer combined with rising real estate prices is a sign of a bubble that is probably in its last stages before popping.

    • 0 avatar
      onyxtape

      Someone in my family in Vancouver just sold an old, beat-up house right smack on busy Boundary Rd, next to a busy fire station, and practically under the SkyTrain tracks. 5 competing offers drove it $40k above asking.

      Crazy. I was just up there yesterday, and they’ve built dense houses with postage-stamp-sized lots all the way to the border south of Surrey. Talked to a Vancouver lady the other day on a business trip who didn’t think twice about commuting daily from Langley into the city.

      • 0 avatar
        Sinistermisterman

        I couldn’t even afford to buy a house in Langley, and when you consider mine and my wife’s income is punching close to 6 figures, that pretty much sums up Vancouver. Oh, and lets not forget that Vancouver ranks number TWO as most congested city in North America…
        http://www.cbc.ca/news/canada/british-columbia/story/2012/07/10/bc-traffic-congestion-vancouver-ranking.html
        Why do people want to live here again?

      • 0 avatar
        mik101

        And sadly its those still fortunate enough to own these properties that results people claiming things like this:

        http://www.examiner.com/article/the-average-canadian-is-now-richer-than-the-average-american

        For now the bubble continues to grow. It will still burst. It’s just taking longer. I know one thing is for sure, I’m definitely no richer than before the bubble in the USA burst. In fact, I don’t see how anyone that didn’t benefit from the bailouts directly, or hasn’t made money from increasing property values, could be any better off.

        (Disclaimer: I’m from Canada)

        I see no reason not to take the 0% if you feel money isn’t being left on the table. The same rules about whether you can afford the car or not apply, regardless of the interest rate.

      • 0 avatar
        changsta

        The increase in housing prices in Canada is being caused by foreign investment, and is largely centered around the major urban areas: Vancouver, Calgary, Toronto, Montreal. I don’t think there will be a complete crash in the housing market like in the USA, as the lending guidelines are much more strict north of the border. Remember, the market crashed in the USA due to Sub Prime Lending, and a high rate of foreclosure. A mortgage with less than a 20% down payment needs to be insured in Canada. The other factor that seems to be largely ignored is the shortage of new rentals being built in Major Urban areas. If the condo market crashes, assuming the purchasers can afford the mortgage, I bet they’d be able to coast on rental income until the market corrects itself.

        The current market is what it is due to low borrowing rates. With such low returns on “safe” investments, like GICs, Terms, Income Funds etc, property investment seems more and more attractive.

        In regards to more and more people taking 0% financing for longer periods of time, you’d have to be a fool not to in my opinion. Most car loans are open ended and can be paid out in full with no penalty. Why wouldn’t you want the lowest monthly payment possible? If you can pay more, go ahead. If someone is willing to lend you money with no interest costs, that’s their problem.

      • 0 avatar
        APaGttH

        But I would still move to Vancouver tomorrow with the right job offer. It is an amazing city.

    • 0 avatar
      CompWizrd

      Right, and we also do mortgages a lot different from our American neighbours. Most of us Canadian do the usual 25 year amortization, but unlike the Americans, we have 5 year terms for most of us.. you _can_ get a 7 or 10 year term, but the rates will be much higher. This means that every 5 years we have to go shop around for rates, or accept the renewal offered to you… and you have to qualify based on the new rates and if your house value has gone down enough, you’re in trouble.

      Generally if you have a LTV (loan to value, and they usually need some sort of appraisal or realistic value) of 80% or more, you’ll need mortgage insurance, and if you are doing a secured line of credit against your house, you can’t go over 65%.

      On the upside, our rates are lower.. it’s not too hard to get a 5 year fixed (with that 25 year amortization) at 2.99% now.

      We also have variable rate mortgages, but if you’re doing mortgage insurance you have to qualify for that rate as if it was a fixed rate mortgage.

      Also, most lenders tend to have a 32% mortgage to gross income maximum, and 40% or so total debt.. stops someone from taking out a mortgage if they already have too much debt.. though I understand those ratios are similar in the US

    • 0 avatar
      carbiz

      Vancouver and Toronto are fine, so long as the stakeholders (real estate agents, brokerages, huge multi-national developers, international banks, old white people who own desirable properties that they bought decades ago for pennies, and the Immigration Industry and their sycophants) can manage to keep the music playing.
      Nobody cares that there are no jobs in either city. Nobody cares that the manufacturing base in Ontario is wiped out, or that our once mighty energy utility is burdened with the highest non-sovereign debt in the world. Nope, all is wonderful. Just look at all those cranes.

      Hey, I’m a property manager, and I know my job is secure. Too bad everyone else’s job is being outsourced to Asia, or repatriated back to the U.S.
      Time to bring back the Auto Pact.

  • avatar
    DenverMike

    If you can truly afford it, you’d be able to save for it in 2 years and walk in paying cash. Then you start to realistically examine your $50K yearly income. Goodbye Lexus and hello Toyota.

    Once you set your mind on it, you’d likely push yourself to temporarily live on the cheap and shorten that to a year.

    It quickly becomes a game as you watch your savings multiply and put in for all the overtime you can get.

    I bought my first new car that way and haven’t looked back since.

    I’ve also never paid for comprehensive insurance and this put me in a stronger financial position. Of course, I had to modify how I drove and where I parked. My 6 yo MR2 did get stolen (when I loaned to a friend) and that’s why I became a kill switch expert.

    Junk like navigation, sunroofs and leather on the dash (as well as paint and fabric protector rip-offs) wouldn’t sell so well if dealers were prying greenbacks directly from buyer’s hands.

    • 0 avatar
      jmo

      Why would you ever pay cash if they are offering 0%?

      • 0 avatar
        Feds

        Because the finance charge is baked in to the MSRP. If you walk in with a suitcase full of hundreds, you can probably negotiate a decent portion off the price you’d be able to finance at.

        You may even be able to get an interest bearing loan from a bank, negotiate a cash price from the dealer, and save money in the long run.

      • 0 avatar
        jmo

        “If you walk in with a suitcase full of hundreds, you can probably negotiate a decent portion off the price you’d be able to finance at.”

        So, you’re saying if you pay cash, the dealer can negotiate a lower price from the factory for a car they have already floor planned?

        You might get a better deal if the offer is $2000 factory cash back or 0% – but that would hinge on what other low risk investment options you have available.

      • 0 avatar
        bikegoesbaa

        “Because the finance charge is baked in to the MSRP. If you walk in with a suitcase full of hundreds, you can probably negotiate a decent portion off the price you’d be able to finance at.”

        You’re assuming that the guy taking advantage of 0% is paying MSRP or closer to MSRP than the guy with a suitcase full of cash.

        Do you have any references that prove this to be true?

      • 0 avatar
        DenverMike

        @jmo – I knew you would say that, but it just sends a bad message to yourself. If you’ve got the willpower to stay with 0% financing *only*, great.

        Last I heard from my ex, she was living way beyond her means, but because of her good enough credit, she had a new 0% car loan and her condo was filled with 0% furniture, 0% appliances and 0% home electronics.

        This is fine, but if she misses a single payment or is even a minute late, her purchases go to 24 or whatever % financing.

        I hope for her, things don’t slow down at her work because she’s way out there, but don’t forget your paying full price for cars with 0% loans plus are forced full-coverage insurance.

      • 0 avatar
        sunridge place

        @Feds

        The 0% isn’t baked into the MSRP…the MSRP is the MSRP.

        0% is offered in lieu of a cash rebate in most cases. So, a 0% deal will have a higher price than if you pay cash or arrange financing outside the supported rate and take the rebate.

        $35k car at 0%

        or

        $35k car with $3k rebate= $32k car cash/traditional interest based financing.

        Any negotiating beyond the car company rebate can happen in either scenario…doesn’t cost the dealer a penny to go with the supported 0% or the cash back.

      • 0 avatar
        fvfvsix

        Depends on how expensive the car is. If I buy, say, a Honda Civic, then I’ll just write a check and not worry about the hassle. If it’s a BMW 3 series, then I’ll take whatever cash incentives and finance with my credit union for 24 months. I don’t mind paying $700 to my credit union to save 2K+.

      • 0 avatar
        Feds

        @JMO

        No, but if the car were guaranteed to be leaving today vs. risking sticking around beyond the next floorplan payment, the dealer might be happier to dip into the holdback. Actually, you’ve summed it up in the second part…

        @sunridge place

        Now we’re just pushing wooden nickles as far as the consumer is concerned. Financing is provided my the manufacturer (or M), who “suggests” a “retail price” based on the fact that you are financing it at 0%. However, in the event that you pay cash for it today, they’ll give you some money back. Your money. That you haven’t given them yet… That’s a purchase price that is lower than the MSRP.

        So ultimately, you spreadsheet up cash purchase price today (minus cost of borrowing from institution of your choice, if applicable) vs. investing the msrp at 0%, and see who comes out ahead. Include a hedge for your risk tolerance, and make your informed decision.

    • 0 avatar
      bikegoesbaa

      “If you can truely afford it, you’d be able to save for it in 2 years and walk in paying cash. ”

      How is that better than even a two-year loan at 0%?

      If you can truly afford it and want/need a new car, then why save for two years while also paying the additional carrying costs and further depreciation of your current car?

    • 0 avatar
      Deaks2

      Assuming an ROI of 3% on a average investment, paying cash up front for a vehicle instead of taking advantage of 0% financing, is quite simply penny wise but pound foolish.

      • 0 avatar
        DenverMike

        If I can’t pay cash for it, that tells me I can’t afford it.
        If I own it, I own it out-right. It’s just what works for me.

        You’re not the first, I’ve been called a fool my whole life for delaying gratification and paying cash for cars, trucks and houses as well as toys (even though I’ve always maintained a near perfect credit score). I doesn’t take as long as you think.

        I’m not a trust fund baby by any means, but I do live beyond my modest income because I’ve always avoided the ‘play now, pay later’ attitude like my friends.

        Guess who they come to when they’re behind on payments?

        My dad used to borrow money from me when I was a kid. When I was 14, my dad had an opportunity to buy a brand new double-wide
        mobile home (half) that had laid (blown) over while in transit for $1,000, but was flat broke. Of course he came to me (that was 1982)and he still lives in it. We built the other half on a burnt trailer (frame).

      • 0 avatar
        jmo

        “If I can’t pay cash for it, that tells me I can’t afford it”

        Who said anything about not being able to pay cash?

        Apparently you don’t believe in making your money work as hard as you do – which is fine. You want to leave a few grand on the table so you can sleep better – that’s a perfectly valid thing on which to spend your money.

      • 0 avatar
        DenverMike

        @jmo – If you can go through life *only* paying 0%, that’s fine. I know you’re not saying you’re not paying reasonable interest somewhere else. Like a home mortgage? That’s right, you rent (IIRC).

        You have that good of credit precisely because you have a rich history of paying moderate interest.

        There’s no doubt and you’re not denying that you’re paying more elsewhere just so you can feel good about scoring (!) a 0% loan.

        It doesn’t impress anybody.

      • 0 avatar
        fvfvsix

        ROI of 3% for an average investment in 2012? Surely you must be joking. US Treasuries are what I would consider a safe, average investment and they ain’t paying 3% right now.

        A dividend paying stock is about as risky as I would go, and you’re still only likely to net about $300 in gains over a year period. Welcome to the new normal.

      • 0 avatar
        dtremit

        @DenverMike — just because you *can* pay cash for it, doesn’t mean you should. Heck, even if you have cash on hand for the car, you’re better off putting that cash in an interest-bearing checking account and setting up automatic deductions for the 0% loan. Granted, that delta isn’t very high right now, but it’s non-zero.

        I get that using credit doesn’t work for you, but it’s not necessarily an irrational decision for other people.

      • 0 avatar
        DenverMike

        @dtremit – I never said I was totally against it in all instances, and all people, but I’m more referring to the entire lifestyle.

        We’re brainwashed from day one to consume more than we need with more than we have.

        This article wasn’t necessarily about 0% financing that not all Canadians will qualify for or even want.

        I know there needs to be less of me and more of everyone else that are getting instant gratification for this whole democracy thing to work. I’m not going to be one of them, plain and simple.

      • 0 avatar
        Dingus

        +1 Simple economics. I am a Canadian, with a mortgage. I don’t buy anything I cannot afford, but I finance everything that is at a lower rate than the return on my investments. Money today is worth more than money tomorrow.

    • 0 avatar
      carbiz

      You have absolutely no idea how the car sales industry works. At least not in Canada. There are no ‘hold backs’ or hidden charges. In Ontario, the new laws state that ALL fees must be disclosed in the advertising. The dealer gets a lousy PDI credit to remove the plastic shipping coverings, wash the car and take it around the block to make sure the wheels don’t fall off from the factory, and there is usually some form of market association credit (couple hundred dollars) that the dealer gets ONLY if they sell from inventory.
      The zero percent comes from the OEM, or their marketing arm. If you walk away from that, then you are an idiot.
      Sorry for my tone, but there is no way of sugar coating that.

  • avatar
    Secret Hi5

    The big, pretty blue font says “$99,” and the small print underneath says “bi-weekly.” (The other payment plan shows a monthly payment . . . Interesting.)

    • 0 avatar
      CompWizrd

      That’s common, since most people tend to think there’s 24 bi-weekly periods in a year(12 months times 2).. but there’s actually 26… makes the payment look about 8% better, and I’d bet that most people wouldn’t even notice they’re making that extra two payments a year.

  • avatar
    Force

    For those wondering where the 0% comes from, it’s an incentive like any other. Instead of putting cash on the hood, manufacturers buy down interest rates with their banking partners (a process known as “subvention”). Basically, the OEM is paying the bank to offer the interest-free loan to qualifying customers by reimbursing them for lost interest fees.

    This benefits customers whether they can afford to pay cash for the car or not. For those who need to finance, it means lower payments and no interest cost. For those who could buy the car with cash, it allows them to take advantage of the time value of money by pushing repayment of the capital into the future with no interest penalty. Finally, for the OEM, it helps protect residual values as the purchase incentive isn’t being offered in the form of a straight cash discount.

  • avatar
    Neb

    For those people thinking how bubblicious things have become, remember: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

    Maybe we should try to find the silver lining here. In a few years, an enormous glut of high-quality used cars?

  • avatar
    highdesertcat

    I’m not Canadian nor do I reside in Canada, so I don’t presume to understand what works for them.

    But it would seem to me that there is merit in buying something (anything) with other people’s money that you pay a fee for in interest charges, as long as you don’t mind paying for that borrowed money and can otherwise afford it.

    My own philosophy is that if I can’t pay for it, I can’t afford it. That could be my Portuguese/German ancestry and just one reason why I built our house in the desert in stages, room by room, expansion by expansion, over a 16 year period.

    Now, that worked for me. Buying a car or truck on credit? Naw, that doesn’t work for me, since the vehicle depreciates at a faster rate than the borrowed money is repaid.

    In essence, I’d still be paying on a fully depreciated vehicle that has a retained value of nil. That’s kinda like buying a fully furnished house and financing all the appliances in it.

    But if it works for the Canadians, may they live long and prosper.

    • 0 avatar
      fvfvsix

      “But if it works for the Canadians, may they live long and prosper.”

      highdesertcat, +1.

      The funny thing is that because you and I can do simple math, we know that it isn’t going to work for them much longer.

      Yet, there will be tons of folks coming along and whining about how no one saw it coming and the bubble burst was totaly unexpected…because it’s totally possible for house prices in Canada to exceed 10-15x the average incomes for sustained period.

      Yeah, it works until it doesn’t.

      • 0 avatar
        highdesertcat

        I hope it works for them. I really do. I hope they have a better run government than we have enjoyed in the good ol’ US of A since Bill Clinton left office.

        I’m no Democrat, I’m an Independent, but my life was better with Bill in the White House and the Republicans running Congress. You gotta give credit where credit is due.

        And, yeah, Shrub had his back against the wall with 9/11, but I was still doing pretty darn good with the Shrub in the White House.

        But now? Lord have mercy! The economic policies of the current administration have eviscerated the American economy, and their energy policy for the American people has raised energy costs disproportionately on those who can least afford it. IOW, my dollar ain’t what it used to be.

        Don’t misunderstand me, I don’t care what gasoline/petrol/benzine costs. I’ll buy it no matter what the price, just like most Americans. Ahh, but those who live from payday to payday?

        There are a lot people hurting in America, and I mean hurting bad. As bad as never before in recent American history. No amount of welfare, hand outs and bail outs, will ever get America ahead again. It takes entrepreneurship, self-starters and small business expansion. IOW, policies that enhance growth and job expansion.

        But Obamacare has spread so much insecurity among the SMALL business owners in America that there is a mad scramble to dump whatever number of employees it takes to get below that magic 50-employee mark so as not to get dinged by mandatory healthcare requirements.

        If you can’t get below that 50-employee mark, your operating costs will sky-rocket which will require raising your prices to offset your added expenses. An unintended consequence may just be reduced sales as well.

        If this works for our friendly neighbors to the North, I say Good Show! But the smarter ones? They’ll tread a lot more cautiously than the ones who pursue long-term indebtedness with wild abandon. At some point, the *@#%^*&+* will hit the fan, like it did for us in America. And the result is what you see in America now. It ain’t pretty.

    • 0 avatar
      28-Cars-Later

      “just one reason why I built our house in the desert in stages, room by room, expansion by expansion, over a 16 year period.”

      Now that’s old school HDC. New school isn’t working out too well if 2008 is any indication, others should heed from this example.

      • 0 avatar
        highdesertcat

        Yeah, I know it was old school. But I was financially insecure for decades, putting my wife through college, then my kids.

        But it all came together in 1985 when I retired from the Air Force and my wife took over her family’s real estate business as senior partner with her dad.

        We built a 1600 sq ft cinder-block house in the desert to start with where we could live after my retirement in 1985, and expanded on that over the years to where it is now 4800 sq ft with 6000 sq ft of roof cover, including the three car ports.

      • 0 avatar
        Detroit-X

        highdesertcat: What’s the interior and exterior finish on your house? Where does the insulation go, and what type insulation is it? (Just curious; I’m into houses too.)

      • 0 avatar
        highdesertcat

        Detroit-X, both interior and exterior finishes have changed since initial construction was completed in 1983.

        We lived in Air Force Base Housing until my retirement in 1985 so getting up the basic structure was not a rush job. We moved in during May-June 1985. I retired later that year.

        Initially, the gray cinder-block walls of the original 40ft X 40ft structure had no insulation, and a hot tar/gravel roof (1X12 slope) supported by 2X4 A-frame rafters spaced 12″ apart, covered with 1/2″ plywood and fiber-board edging.

        After all the years and upgrades the entire interior in all living spaces now is standard 1/2″ gypsum wallboard supported on 2X2 wood frames against the cinder-block, while the outside is a single-brick facade over 1/2″ Tyvek foam insulation panels.

        The space under the roof and inside the 2X4 framing is insulated with rolls of Corning fiberglass matting, that is also wrapped around the heating/cooling ducts. It works pretty well in the desert but I also use a manual attic fan to force the hot air up out of the roof vents on top of the roof during the summer.

        In the area outside of the cinder-block core, construction is basic 2×4 stick-built frames on the same raised concrete slab, and the entire structure is now covered with California ceramic shingles, over 115# tar-saturated fiberglass roofing paper.

        Flooring throughout is standard Mexican 13X13 ceramic tile over the concrete slab. Dirt cheap in this neck of the woods. I think I paid 5-cents for each 13X13 ceramic tile, and 3-cents for each red wall-brick for the outside wall, in El Paso, TX. The cinder-block at the time was 50-cents a piece at the local Do-it center in town.

        The roofing tile was around $2.50 a piece, and of course I had to haul all of it up from El Paso, TX, as I needed it. This didn’t happen overnight. I took me many years to get to the point where I am today.

        I was never in construction. I did my first tour in Viet Nam in 1967 as a Heavy Equipment Operator with the 554CES (RED HORSE) and learned to build hootches and other structures by swinging a hammer, unless I was operating heavy equipment. I was a two-striper then and used as manual labor wherever I was needed. I took what I had learned there and applied it to the house we built here, and I learned more as I went along on my own.

        An old illegal alien Mexican taught me how to lay brick and tile the old school way and now I’m pretty good at it. I do all the upgrades for the houses owned by my father-in-law.

        I did all my own electrical wiring after the breaker box, and have expanded that to two 200-amp service GE panels over the years, installed by a local licensed electrical contractor, after the electric meter.

        The only thing I steer clear of is plumbing. I let the pros with a truck full of spare parts and fittings handle that aspect of building wherever I go.

        The place is still standing and our home-owners insurance company sent out a code inspector years ago and the house passed, so I must have done something right.

    • 0 avatar
      carbiz

      Your own Rockefeller, reputed to be the world’s first billionaire is often quoted as having said, “Buy what appreciates, lease what depreciates.”
      Nothing depreciates more than a car.

      Paying cash is great, but in the modern world we recognize that many things are out of reach with cash. The cost of taxis and buses for two adults can take a$3-400 chunk out of a monthly budget while you and your other half are trying to save cash for that new buggy. What sense does that make? Or that 10 year old rusting heap is costing $2,500 in ‘maintenance’ costs per year, and the transmission is about to go any day. Would it make sense to pour $1,600 into a transmission for the heap, or use that as a down payment on something reliable.
      Would you want your wife/girlfriend to drive a 10 year old heap in the winters of Sudbury?

      ‘Nuff said.

      • 0 avatar
        DenverMike

        Why would someone that’s paying cash for a new car, currently be driving a “rusting heap” (costing $1,000s in upkeep/repairs annually), riding mass transit, or hailing taxis everywhere?

        That doesn’t make much sense. Why wouldn’t they have taken a portion of their savings and bought a clean lease-return by now?

        I don’t have to tell you that leased cars depreciate just as fast as purchased cars, but why try to paint cash buyers as idiotic? Does that make you feel better?

  • avatar

    For most buyers, it’s all about the monthly payment. This is why rational folks buy an Elantra new instead of a CPO BMW. They want certainty above all else that the monthly car budget is a fixed number and will pay huge for “new with a warranty”.

    Our money has no value. It is truly bizarre to see that the bank pays less than one percent on deposits, while the government pumps the banks full of money for “quantitative easing”. Borrowing that money at 0% makes perfect sense if the money comes from a trivial percentage interest rate.

    Food, Taxes, insurance, tires, etc, continue to increase despite being told there is “no inflation”. Most folks have less disposable income than five years ago. Anything they can do to lower the monthly (60-72-84-Hike !!) will find a market.

    Your housing bubble hasn’t burst yet ? Are you the last ones on the planet ?

    The gist of Obama-care (The Affordable Care Act) is that Job should not equal health insurance, and that one should be able to hire employees without this problem. That is one reason US companies put plants in Canada…no pension or health care headaches. The sooner we divorce health care from one’s employer the better.

    • 0 avatar
      carbiz

      Canada is a vast country with the population of California. We take in 350,000 immigrants a year (throw in another 20k in ‘tourists’ who never leave), most of whom end up in the Greater Toronto and Greater Vancouver areas, which is creating a huge, completely artificial vortex. A 650 sq ft concrete box will cost you $400k in Toronto. Drive 2 hours and you can buy a 1,800 sq ft bungalow for the same money. Drive another 2 hours and you can buy a 3,500 sq ft home on a 5 acre lot.
      The housing market never burst here because Paul Martin would not let the banks get greedy when they wanted to do all the same silly things the American banks started to do a couple decades ago.
      And with 130,000 new Canadians arriving to Toronto every year, bringing with them hordes of cash to buy (made in China) appliances, (made in Japan) cars, and (made by Russian/Polish emigres) new condos, the ripple effects in the local economy are significant, if somewhat illusory and impermanent.
      Judging by the way Canada’s current account has swung from surplus to deficit since 2008, I’d say the entire scheme is about to collapse. The recent arrivals have no affinity, no roots and certainly no respect for their new homes, and even if their job is legal and they actually pay income taxes, they probably spend a good portion of their net income back home to either a) support the village, or b) prepare for their extended clan’s eventual arrival here.
      Pick your poison, kids. When the housing market crashes, it will take all else with it because there is no tax base to support the local appetites for new subways, wind farms (sold to Korea, of course) and homeless shelters.
      I know of at least 2 banks that will give Canadian credit without Canadian job history. Entire towers are sold to ‘new Canadians.’ I literally had to toss one of the largest real estate agents (a white woman) out of the sales office I was working in because we were not ‘open to the public.’ She was furious, because she knew exactly what was going on.

    • 0 avatar
      fvfvsix

      “The gist of Obama-care (The Affordable Care Act) is that Job should not equal health insurance”

      Therein lies the logical fallacy sold to all Americans. Health Insurance does NOT equal Health services. You’ll find that out soon enough.

  • avatar
    CompWizrd

    minus the thousands of dollars of addons such as taxes, that $170 a month plus the $30 (1395 / 48) is actually very good for Canada.. I’m paying 287 a month all-in on a 48 month lease on a Fit Sport, and that was after $3800 down… Interest rate on that Fit was 5.9, though I see they’re offering 3.9 now.

  • avatar
    OldWingGuy

    Disclaimer: I’m a Canuck.

    Years ago I found the trick to making the interest payment on my car tax deductible.
    People generally have no problem borrowing to buy a car. But they have a hard time borrowing to buy stocks, bonds, etc. (But the value might drop!, forgetting that cars depreciate a staggering amount).
    So, save up and pay cash for your car. Borrow the equivalent amount and invest in the stock market. Shazam, the interest is now tax deductible. And at a 45% marginal rate (or better, depending on your province), thats a big advantage.
    I applied the same to my house, etc. Never a penny in non-deductible debt.
    One other thing – a per peeve of mine, is when people refer to cars as a depreciating asset. True, they depreciate. But an asset ? To me, an asset is something that returns an investment (stocks, bonds, business machinery, etc). I don’t consider my car any more of an asset than my home stereo or TV. Rant off.

    • 0 avatar
      bikegoesbaa

      If a car enables you to reliably get to work/school on time then it is an asset by your definition, no?

    • 0 avatar
      rodface

      As the other responder said, is your car not an asset, because it enables you to live your life, arrive at work on time, etc.? Your TV and home stereo are luxuries. Your ability to generate income would not be significantly impacted if they were gone.

      • 0 avatar
        OldWingGuy

        I see your point.
        I tend to view this the same way Canada Revenue Agency (our equivalent of the IRS) does. That is if a vehicle is used directly in the generation of income, then it is a depreciable asset (ie a service truck, or delivery truck).
        But driving to/from work is not, in and of itself, generation of income, and thus not deductible.
        For instance, if you have a vehicle used for both personal and business, the business portion is deductible from income, but not personal mileage. Driving to/from your work is specifically not allowed.
        Thats a lot of tax mumbo-jumbo.
        I still adhere to my premise – that a personal vehicle is not an asset, not in the way that stocks,bonds, real estate etc are. From these I expect a good chance of an income stream, an appreciation, or both. From a personal-use vehicle I expect only expense and depreciation.
        The problem with Canada now, and the USA a couple years ago, is way too much borrowing. 7+year car loans ? 30-year house amortization ? Give me a break.
        As an aside, I wonder how many big flat-screen TV’s (a luxury, as you note) have been sold to people with working tube-type TV’s, while their house/car/student loan is still unpaid.

  • avatar
    loj

    I’ve read most of the comments and I’m trying to understand how this works in Canada, but I have a really hard time believing that a dealer is going to kick up his heels and call me a sucker when I drive away in a car that I bought with cash. I was taught that there’s no such thing as a free lunch – or a car you couldn’t buy for less with cash, or financed over a shorter term.

    And an 84 month loan with biweekly payments, regardless of the interest rate, throws up major red flags for me. Call me old-fashioned, but that reeks of a deal aimed at people who can’t afford the car in the first place.

    Now if I were Ferrari shopping and had the cash to buy one outright, you can bet I would finance as much as possible and invest the cash in a way that makes significantly more than it would cost to finance the car. But in comparing a 3-year versus a 7-year car loan on a $25k car, I’ll choose the shorter term and negotiate a lower purchase price every time.

  • avatar
    hifi

    At 0%, I’m borrowing money for free. Free is a lot less than the rate of inflation. So I’m making money. I have paid for my last cars outright but, if I could do this deal, I would.

  • avatar
    MagMax

    I live in Vancouver where I own my home, thank goodness, because I couldn’t afford to buy it today..Vancouver has beautiful scenery and the best weather in Canada if you don’t mind lots of rain. But aside from the setting and the weather,, there are many problems. We have terrible streets and roads, high taxes, homelessness, a drug and crime ridden area just off the downtown that’s a disgrace, no highways or freeways so terrible congestion and pollution as vehicles idle in traffic, and on and on. The fact remains that I wouldn’t live anywhere else in Canada because I hate snow but what the off shore money has done to housing prices here is ridiculous. Shacks sell for a million just for the land value. We also have a disproportionately huge number of Mercedes, BMW, Audi, Lexus and Volvo cars in this city, most painted in drab, dark colours or silver, with black interiors. Again it’s off shore money that pushes that market.

    In May as my car lease was about to run out I acquired a new Mercedes E550, not in a drab, dark colour and not with a black interior. I decided to buy instead of lease because I’d have paid some $5000 in lease interest over 3 years in my lease but with .4% financing, my total finance cost over three years was around $350. Although I had the money sitting in my car account I decided not to pay cash but to finance. I earn 3 times more in bank interest on that saved money than I pay out in finance charges so I’m ahead financially by using someone else’s money instead of my own. I think it was a good decision since I had the funds on hand, limited the length of the payback period, and took advantage of the company’s subvented finance rate. By the way, the price of the vehicle was not affected by my decision to finance or lease. In addition to the low interest rate there was a further rebate on the first three payments and those would have applied equally to purchases or leases. So under similar circumstances it makes excellent sense to borrow at 0% or near 0% instead of using your own. But I did have to sit down and do the comparison calculations to make sure that I was going to be ahead financially. I’ve made similar deals on cars in the past but in every case I had car money saved up before making the deal.

    Oh, and I put the maximum of $5000 on my credit card to get points and then paid off the card at the end of the month.

    But if I’d been working instead of being retired, were renting instead of owning, and wasn’t sure whether my costs might rise unexpectedly or my income might drop or disappear suddenly, I would not have taken on another risk. I do want to be able to sleep at night.


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