Long-Term Car Loans Rising In Popularity North Of The Border

Derek Kreindler
by Derek Kreindler
long term car loans rising in popularity north of the border

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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  • OldWingGuy OldWingGuy on Jul 24, 2012

    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.

    • See 2 previous
    • OldWingGuy OldWingGuy on Jul 25, 2012

      @rodface 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.

  • Loj Loj on Jul 24, 2012

    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.

  • Hifi Hifi on Jul 24, 2012

    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.

  • MagMax MagMax on Jul 24, 2012

    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.