- Helping you drive happy

Are you deeply in debt after buying a new vehicle?

The number of car loans is skyrocketing in Canada By ,

Many Canadians are financing a new vehicle purchase over six, seven or even eight years, while others agree to an interest rate of more than 10%. According to a report by the Automobile Consumer Coalition (ACC), we could soon be facing a crisis. 

Car loans granted in the past eight years exceed $120 billion, and they have longer terms than before. But while automakers are happy to post record sales, the economy is still idling. Consequently, there could be a debt crisis in Canada similar to the one that stemmed from the real estate market in the U.S. back in 2008-2009. 

The problem is that with 0% APR financing over 7-8 years, more and more Canadians are tempted to buy larger or more luxurious vehicles rather than invest in funds, for example. Also, what happens with longer terms is that the market value of a car at one point can be lower than the amount still owed.

An ACC survey of 1,016 Canadian drivers reveals that 69% opted for financing over six or more years. One out of three said they don’t have any margin for repair bills.

“It’s wrong to think you can buy a bigger or more luxurious vehicle for the same price,” says George Iny, president of the Automobile Protection Association (APA). “Your monthly payments will be the same as if you had purchased a smaller car, but maintenance costs, tire prices, and fuel consumption will all be higher.”

What about second- or third-chance credit?
The ACC report also highlights an increase in subprime loans, meaning higher-interest loans to people with a bad credit record or excessively large debt. The growing popularity of second- and third-chance credit at car dealerships is alarming. 

As a result, many consumers end up paying nearly double the initial loan in interest fees and prior debt.

So, the next time you buy a car, ask yourself if you really need a bigger model that will require 2-3 more years of payments. Think about setting aside some money for fuel and repair bills, tire changes, and other fees. I’m sure you wouldn’t want to be paying 22% interest over five years, resulting in a $20,000 hatchback costing you $40,000.

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