By on March 13, 2015

72months

Faced with less disposable income, higher taxes and more expensive vehicles (in most cases), loan terms in the Canadian market has gradually shifted to one where bi-weekly and even weekly payments have become the advertised norm, with 72, 84 and 96 month loans appearing as a fixture of the new and used vehicle marketplace. And with household debt levels reaching record heights in Canada, the chart above should be deeply concerning.

While the trend of long term loans has been brewing for some time in Canada, February marked a milestone. Nearly 70 percent of consumers  opted for loan terms of 72 months or longer. Consumers will, in all likelihood be paying thousands of dollars on interest alone on what would normally be a modestly priced vehicle.

One scenario, outlined by a friend, saw him go into a new car dealer to purchase a truck for both his primary vehicle and a work vehicle. The truck was a modestly equipped domestic full-size truck, already deeply discounted to $35,000 CAD (plus 13 percent sales tax). The loan terms offered were 96 months for 3.99%. That would have added up to $6,000 in interest payments over the loan term.

While Canadians are apt to buy smaller, cheaper passenger cars, full-size trucks still reign at the top of the sales charts, and transaction prices of these vehicles are going nowhere but up.

Chart courtesy J.D. Power via The Globe and Mail

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46 Comments on “Chart Of The Day: 8 Years A Slave, Redux...”


  • avatar
    jmo

    “not to mention more expensive fuel a”

    What?

  • avatar
    wmba

    The average prole has no more idea of budgeting than the common garden sparrow. Witness the TV shows where normal looking people face a stern Home Ec taskmaster, reteaching them addition and subtraction from Grade 4. The stupid smiles on their faces, not of embarrassment but of someone witnessing magic, is a testament to their non-understanding that spending $4K a month, while netting $3K and maxing out their credit cards, is not sustainable.

    And then they complain when told to cut back that their remaining fast food budget isn’t going to be enough for their lifestyle. 144 months wouldn’t faze these geniuses.

    • 0 avatar
      Sjalabais

      There it is. The reason why I threw out my TV 12 years ago and never looked back. This sh*t creeps into your mind and makes you lose faith into mankind.

    • 0 avatar
      OneAlpha

      Well, that and the fact that they’ve been raised by movies and TV shows that portray financially-responsible people as uncool, uptight, joyless workaholics.

      Life’s too short to sweat the details, man!

      • 0 avatar
        ClutchCarGo

        ” the fact that they’ve been raised by movies and TV shows that portray financially-responsible people as uncool, uptight, joyless workaholics.”

        I suspect that this is more at the heart of the matter than an inability to do the math. Every citizen in NA except the Amish are bombarded constantly with messages to consume, regardless of available income. There are precious few messages or models anywhere in the culture that celebrate the virtues of self-denial and deferred gratification. I would bet that any TV show that tried to do so would find very few sponsors for the programming.

        • 0 avatar
          OneAlpha

          Yeah, I read somewhere that the reason Cadillacs used to be desirable cars was that they represented success that had been EARNED, rather than simply PURCHASED.

          The guy you saw driving a Cadillac 50 years ago was a middle-aged man in a nice suit who’d obviously worked his way into that car, not some 21-year-old douchebag with an orange tan and white-framed sunglasses who blew part of his inheritance on it.

        • 0 avatar
          Lou_BC

          ClutchCarGo –
          That is the whole point of mass media of which television shows and movies are a part of.
          Health, wealth, youth and beauty are sold as the only true way to happiness.
          They push the idea that if you don’t “have it” or are deficient in any of the 4 areas you can borrow your way into projecting the image of the magic 4 to the world and/or to yourself.

  • avatar
    Arthur Dailey

    Certainly Canadians pay more for fuel, houses and most consumer goods.

    The difference in taxation is debatable and depends upon where you live (province/state) and your income level. Currently in Canada some corporate tax rates are lower than comparable American rates.

    Think Canadians pay some of highest income taxes in the world? Think again
    Angela Mulholland, CTVNews.ca
    Published Friday, April 11, 2014 10:28AM EDT
    Canadian workers are often made to feel that they pay some of the highest income taxes in the world, particularly in comparison with our neighbours to the south.
    But a new report finds there are plenty of other industrialized nations that may face a higher income tax burden.
    The OECD, the Organisation for Economic Co-operation and Development, reports in its annual Taxing Wages report that Belgium workers had the highest tax burden — the so-called “tax wedge” — last year. Their rate stood at 55.8 per cent.
    The tax wedge is the difference between what businesses pay to employ a worker, and the net take-home pay of the employee’s after income taxes, employee-plus-employer social security contributions, and minus benefits.
    Germany came in second, with a tax burden at 49.3 per cent.
    Canada, meanwhile, is ranked 26th among the 31 OECD nations, with a 31.1 per cent tax wedge. The U.S. ranked 25th, with a slightly higher tax wedge of 31.3 per cent.
    Across all the OECD nations, the average tax burden on income was 35.9 per cent last year. That’s up from 35.7 per cent in 2012. The report found the tax wedge rose in 21 out of 34 countries, fell in 12, and remained unchanged in one.
    In most countries, the increase in the tax wedge was almost entirely due to higher income taxes. But in Canada, higher employee and employer social security contributions (such as to CPP) accounted for virtually all of the increased tax wedge.

  • avatar
    energetik9

    Except for two things. Interest rates are at historical lows and I’m guessing the vast majority of borrowers will not keep cars for 6 years (yes, there are plenty of exceptions). I’m not saying it’s smart math, but if I had to guess, I’d say the rationale is that when a consumer knows that are not keeping a car long term, loan terms become less of an influencer in loan structure decisions.

    I also would say that I if I don’t otherwise pay cash, I typically opt for longer terms combined with a larger down payment (as long as the rate structure is not drastically different) and then I usually pay double payments. I like the longer term structure for the flexibly to pay a smaller payment if needed. Once the balance is lower, I usually just pay it off. The net effect being typically I pay off a loan in 2-3 years on a 6 year loan. I fully acknowledge that not all have the means to do this.

    • 0 avatar

      Except if you stretch out the loan for a long time and put little or nothing down, and then trade in a few years, you are going to be upside down on the loan.

      I suspect that people trading in cars they are upside down on is part of the reason for the long terms – they roll what they owe on the old car into the new car loan, and need to stretch it out longer to cover the payments.

  • avatar
    Maymar

    Given the prevalence of longer and longer terms with manufacturer-subsidized 0% financing, I wonder if that’s been a big motivating factor in this shift.

    Mind you, I think they’re currently mostly cutting off at 84 months, which might explain your friend’s high interest rate.

  • avatar
    mmreeses

    ***sigh*** The bulk of Americans have become sharecroppers for the mortgage company and auto financing arms. People aren’t owners of cars/homes, they’ve become perpetual renters.

    grumpy old man rant over. now where’s my Guinness?!

    • 0 avatar
      28-Cars-Later

      Almost as if it was planned as such, hmmmmm.

    • 0 avatar
      dtremit

      Ask an actual old man sometime about what it was like before middle class people could get mortgages. My paternal grandfather had to line up private financing because being a schoolteacher wasn’t considered a reliable enough profession to buy a house, and my maternal grandfather couldn’t buy at all for nearly ten years for lack of financing. (I’m pretty sure both had paid off their houses in full when they retired.)

  • avatar
    mikey

    From my perspective here in the East end of the Greater Toronto Area, their building and selling houses, starting in the low $400 K range. more like $650 – $700 for a fully detached in a nice neighborhood.

    In this area. there is simply not enough jobs, paying enough money to carry the payments, on a 500 K mortgage. So they need to commute into Toronto. We have some of the most congested highways in North America. Combine that with a harsh, car unfriendly climate, and you get a big demand for new, and almost new vehicles.

    The solution to these math challenged folks, is to go deeper, and longer into debt.

    Our governments at all levels, and political stipe, subscribe to the same thought process.

    I’m like H.D.C in this regard, I look after me , and mine.

    I fear that one day “the chickens may come home to roost” and our Canadian dream, may just be a casualty .

    • 0 avatar
      Lou_BC

      @mikey – I do agree that the solution pushed by everyone is not to save money but to spend it. If you don’t have money then borrow it and spend it.
      My wife unfortunately is one that fell into that trap. If the bank card or credit card will spit out the cash then she’ll spend it. It has been a tough process to turn around. Now she whines because the austerity measures put in place to knock down debt leaves little for fluff.

      If you dig a hole you aren’t going to fill it in by continuing to dig at the bottom of the whole.

  • avatar
    Arthur Dailey

    Which means addressing something that many hardliners don’t recognize. Affordable, efficient mass transit actually subsidizes employers.

    It allows them to pay less (workers don’t need to own/operate cars) and recruit from a greater catchment area (reduced time/stress of commuting).df

  • avatar
    RogerB34

    Canadian household debt to income ratio is 163 percent.
    Comparisons in percent:
    EU18 Eurozone 97
    Germany 85
    USA 92
    UK 133
    High household debt levels mean less consumer spending resulting in slow economic and job growth.

  • avatar
    VenomV12

    When I look at my family members in Canada and their houses and what they make, I wonder how they and that whole country are not bankrupt yet and how they are able to afford their stuff? Even if you watch those shows on HGTV like Love it or List it and some others that are based in Canada, the house prices are insane. You would think for what these people are paying for houses they were all cardiologists or surgeons and most of them are far from that. I prefer to pay cash for my stuff and I will not use credit cards other than when I have to like booking hotel rooms, but I go by the old rules that your house should not cost more than 3 times your income, your car loan no more than 5 years and at least 20% down on any loan. A 7 or 8 year car loan is just insanity.

    • 0 avatar
      JuniperBug

      A “house” three times my gross income wouldn’t buy me a 400 sq ft condo in Montreal, and I make above the average salary in the province. It’s a tough time right now for people trying to enter the real estate market for the first time.

      The fact that many seem to be opting for more car than they need and can afford is just asinine. My bet is that many of these 6 year loans aren’t made on things like Yarises.

    • 0 avatar
      OneAlpha

      Yes, this!

      These shows portray some twentysomething couple in Toronto (“Like Chicago but cleaner, eh?”) having been approved for a two-thirds-of-a-million-dollar mortgage.

      Where the hell are these people working that a bank’ll give them six hundred grand for their first house?

      • 0 avatar
        Maymar

        For what it’s worth, when my wife and I bought in Toronto last year, we were pre-approved for about $450k, on a combined income around or a little shy of $100k. Of course, we also didn’t feel comfortable spending that much, but the bank’s primary interest is getting every dime they can out of us (and I assume they figure they’ll be able to safely get their money back from the property if we defaulted).

        • 0 avatar
          DenverMike

          “…we also didn’t feel comfortable spending that much…”

          You should’ve went with your instinct on this. But if you cracked the whip on yourselves for a year, how much could you 2 save? Enough for a cash-buy fixer/foreclosure 2+2? At least you’d own it outright and move on to the next thing, next year with equity plus more savings. This while moving ahead, not backwards and accumulating wealth instead of debt. I mean what’s the total outlay for your 400+K house in 30 years plus repairs, upgrades and maintenance? 3 million? More?

          • 0 avatar
            Maymar

            Err, no, I meant that we didn’t spend our total approved amount, just that what a reasonably sensible amount to spend is not the same as what the bank approves.

            Also, even our fixer uppers go for about $250k (although I think more of those are just land value to build some new monstrosity).

          • 0 avatar
            DenverMike

            I was born poor, made every mistake I could, so I had to figure out a way out of poverty, or I’d still be there.

            You 2 are good people, have the stable careers and good income to save for a 1st time, basic home, in just a few years of buckling down and paying for it in full. I don’t mean to pick on you specifically, but the masses are trained from an early age not to save or delay gratification. Ever! Most want to start at the top and work their way down.

            Unless you’re handed everything by rich ancestors, I don’t see a problem with starting with beater cars and homes that were headed to being torn down. Such a waste. So sometimes you have to drive around and look for empty, unloved places, not really on the market and if the owner will work with you, “owner carry”. Say a 3rd down, 3% and 10 years to pay, except you know you can probably pay it in less than 2 years, no penalty.

            I’m just talking about thinking outside the box. You sound really young, but if not, it’s never too late.

    • 0 avatar
      Lou_BC

      VenomV12 – that is true depending on the area or region you live. Quite a few years back a financial guru looked at housing prices and came up with a list of places where you should not buy a home. That ruffled a ton of feathers in those “no buy” communities. I fully agree with what the guy had to say. If you need double incomes at high paying jobs plus having a few renters in the basement just to eek by you should find a new place to work/live. IIRC he mentioned Vancouver, some parts of the GVRD (Great Vancouver Regional District),Victoria, Calgary (during oil boom upswing), Toronto, and Montreal and Quebec.

      Basically all of the largest metropolitan centres in Canada were too expensive for people to buy homes and live.

      • 0 avatar
        Arthur Dailey

        Except that those areas that are most expensive to live in are the ones that have the most jobs.

        Its not much good living where there is no work. That is why the inner city of Toronto is booming. More construction there than any 2 other cities in the world. Mostly condos of 500 to 800 square feet for singles and young couples, without cars.

  • avatar

    I have to say, almost every post about either manual transmissions or auto financing devolves into a bunch of kvetching about how the “plebeians” don’t do this or that. Hopefully, we can avoid that today. The cockiest drivers I’ve ever met are not the ones who install 12″ lifts on F-350s or the ones who drive brand-new leased M3s…but rather people sanctimonious people who drive cars with manual transmissions, and people who pay cash for their cars or do short-term loans.

    • 0 avatar
      OneAlpha

      Yeah, but anybody who turns their F-series into a brodozer is a cock to begin with, so their being cocky is kind of a fit, don’t you think?

    • 0 avatar
      Power6

      Dontcha know, on the Internet everyone is up in Vegas, got a great deal on their car, pays cash for everything, has no debt, makes double digits on their 401k, lives way below their means, is immune to all marketing and advertising, gets above EPA MPG…etc, etc…

      All those normal peeps haven’t found out about the internets yet.

  • avatar
    sirwired

    At those rates (or less), financing that long is a rational decision, –>As long as you plan to keep the car a while.<– Yeah, if you plan to dump it after 3 or 4 years, you could end up with a nasty surprise at trade-in time. But otherwise, it makes sense for you, and if underwritten properly, makes sense for the bank.

    I don't understand all this moaning about long car loans. Very few new vehicles will have any difficult at all lasting that long, so that's not the issue it would have been at one time.

    Personally, if I was a bank, I'd be asking for gap insurance on the longer loans, but other than that, I don't see why they'd be that special.

    • 0 avatar
      JuniperBug

      The issue I see is with the mentality of having a permanent car payment in a world where everyone is whining about not having enough money for a house/kids/retirement/. In general, the idea is to pay off a car, own it outright, and use that payment-free time to put money into savings, either to help pay for the next car, or to fund some other endeavor. Now you’ve got a lot of people who are paying off a car when it’s already well into its prime, and trade it in on the next new payment as soon as – or even before – they’re finished with the old one. In many cases, they’re not doing it on a basic-transportation-econobox.

      People can do whatever they want as long as I don’t end up paying for it, but generally it seems like a good idea to try to set up purchases in such a way that you continue to get value out of them after you’re done paying for them.

      • 0 avatar
        sirwired

        When it’s not terribly difficult to make more of a return in reasonable savings vs. car loan interest, why NOT stretch out payments as long as you can?

        You’ll end up with MORE savings in the end, because you’ll have collected more returns on your savings than you will have paid towards the car.

        I’m not saying people actually do this on a terribly frequent basis, just that it’s a perfectly rational choice to make.

    • 0 avatar
      Power6

      The moaning about terms at least from my perspective, is that cheap debt distorts the market. As terms are drawn out and cheap money flows in prices trend upward. We can see this easily in mortgage rates vs house values, and college loans vs tuition rates.

      So it prices someone like me out of a new car. If loan money were harder to come by, higher rates and shorter term, then prices would tend lower. Maybe the cars would be total POSs though. Now every market is different I think rightly so many point out the cars last longer and maybe the loan terms track that well, I don’t think it is as bad as mortgage rates where the same house can swing hundreds of thousands as long as the mortgage rate keeps the payment the same. But I do wonder how much the longer terms and lower rates push profit margins up for the automakers, or does it just push them to make more expensive cars at the same profit margin.

  • avatar
    don1967

    Perhaps the most insidious thing about 8-year car loans isn’t the cumulative cost of borrowing, or even the years of negative equity. It’s the way they encourage frequent trading, by making it painful to keep a car once the warranty expires and pleasurable to simply swap it for a new one.

    By contrast a 4-year finance plan has the opposite effect: By giving us a taste of the payment-free life it makes keeping cars pleasurable and buying cars painful. As it should be.

  • avatar
    30-mile fetch

    I kept my prior car for 8 years. I simply cannot imagine making payments for every month of that ownership period.

    • 0 avatar
      highdesertcat

      Many people do make payments for every month of the contract and use when they Lease.

      This doesn’t mean that the vehicle they lease is their only vehicle. It just means that the vehicle they Lease is their newest, most reliable, long-distance traveling vehicle.

      I know several old people who have a Leased vehicle in addition to their rolling antiquities. They’ve been doing the Lease for decades — they just turn in the old and get a new vehicle after the Lease contract expires.

  • avatar
    Whatnext

    Just for laughs I went on the Chrysler Canada site which had 96 month payments! But it appears they don;t offer leases, so maybe this is a way to offer an affordable monthly payment alternative?

  • avatar
    Big Al from Oz

    I really don’t think the reduction of interest rates has the hugest bearing on vehicle ownership. I does and can have a short term influence.

    Canadians’ don’t have the same rate of vehicle ownership per capita as the US. The US is up around or over 750 vehicles per 1 000 and the Canadians’ have around 640 vehicles per thousand.

    This is similar to many EU nations. I do think there is a slightly different vehicle culture between the two countries.

    Canadians’ do drive many US vehicles, but they are more or less forced into that situation due to NAFTA.

    So, how do Canadians get to work? Is their better public or mass transit in Canada’s urban environments compared to the US?

  • avatar
    Glenn Mercer

    All good points, but let’s throw in some more facts. IHS (Polk) reported that the average American (ok, not Canadian, sorry) ownership period for a new car was 4 years and 2 months in 2004, and 6 years and 1 month in 2014. (In large part due to improved vehicle long-term durability.) So, ceteris paribus (leaving aside debt:income ratios, merits of Canadian versus American political systems, whether Canada should apologize for Gordon Lightfoot or not) one would expect longer loan terms. As the lifespan (and ownership tenure) of cars lengthens, one would expect loan terms to lengthen with them. Just like people have come to see 30 years as a fine term for a house mortgage. In 2011 HUD reported the average age of the US owner-occupied housing stock was 35 years. Mortgages are generally 30. Average age of the US car fleet is about 11 years, average new-car loan term as of last quarter was 66 months (Experian)… about a quarter of US new-car loans were over 72 months. Just sayin. Now, as to why Canadians go for even longer terms than us supposedly-more-profligate ‘murricans, I dunno. Maybe months are shorter in the metric system? (Yes, that was a joke. A weak one, yup.)

    PS Miles Davis was Kilometers Davis when he played in Montreal….

  • avatar
    mikey

    @ glen…… You mean kilometres ……eh ?

  • avatar
    Alex Mackinnon

    Canadian cities for the most part have way better public transport than most American cities, with the exception of NYC.

    We’re pretty screwed financially now though. Canada never really had that bad of a time in 2008 outside of the manufacturing sector. We lived off of debt, but never corrected our ways. So we’re probably going to be paying for that fairly soon. The correction can’t come soon enough though. Vancouver is ridiculously expensive right now and people don’t generally make much money here.

    Alberta and Saskatchewan are tanking, while you could describe everywhere else as fragile but benefitting from the low dollar and cheap oil.

    • 0 avatar
      DeadWeight

      Canada has to debase its currency on a relative basis for the same reason Australia will have to; to merely survive, while being able to repay its creditors (in massively deflated fiat currency).

      And this is due to the incredible similarities between Canada & Australia (China is to Australia as Canada is to the U.S., or once was).

      Both are heavily (disproportionately) dependent on global aggregate demand for minerals, oil, metals and other natural resources, both have high debt-to-GDP social safety net costs, both have a manufacturing base in rapid decline, and both have very heavy over-reliance on governmental & private household debt in order to maintain living standards (meaning future living standards will be dramatically lower absent outsized GDP growth and a fierce recovery in natural resource prices).

      The race to debase sovereign currency, and in fact, currency wars, have begun in earnest, not merely as a means to service existing debt costs, but more fundamentally, as a means to keep from imploding.


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