According to a recent J.D. Power and Associates report most Canadians (65 per cent) who borrow to buy a vehicle stretch out their payments to six years or more and even then the average loan payment is a hefty $490.
So here’s the question: is it a good idea or a bad one for so many consumers to lock into making car payments for six, seven, eight years?
First, the ride you buy today is likely to be useful and functioning for the next 15 years or more, according to Consultants from Auto Source you’ll get 308,000 km out of a new ride bought today. At 20,000 km/year, that’s 15 years. Thus, even if you make payments for the first six to eight years of ownership, you can choose to be payment-free for the last seven to nine.
Second, after making car payments for, say, seven years, the vehicle in your driveway will still be worth quite a lot. Auto Source says the research shows it’s a myth that vehicles lost half their value when drive off the dealer lot. The reality is a vehicle depreciates 10-20 per cent when it becomes yours, then 10-15 per cent each year thereafter.
“Overall, it is not uncommon for vehicles to hold close to 50 per cent of their value into years five to seven of their ownership cycle,” says Auto Source. Thus, even if you opt for a seven-year loan, you’ll still have something of value to drive every day when you’ve reached the payment-free point.
How valuable? The average passenger car transaction price, notes Auto Source, was $27,563 in 2014. If you’re average, even after making payments for seven years and getting plenty of service out of your car, your ride will be worth in the neighborhood of $13,000-$14,000. For consumers worried that their car will be worthless after 72, 84 or even 96 monthly payments, there is comfort to be found in how well vehicles hold their value.
The reality of the new vehicle marketplace today is that consumers are acting quite sensibly or at least realistically when stretching out payments for many years.
“If a consumer owns their vehicle for 84 or 96 months — very common — what’s wrong with the lending term being that length?” asks Auto Source. “It may cost more interest but most consumers have a monthly budget for their vehicle and view their payment plan as a life-long endeavor…essentially a monthly payment for life.”
Except, of course, consumers today can secure vehicle loans with interest costs at historic lows. Even loans of 84-month terms can be had at interest rates less than two per cent. This is point three for the case that long loan terms are not such a terrible thing, but rather in some instances a positive.
A new Honda Accord coupe, for instance, can be had with 1.99 per cent financing for 84 months or a GMC Terrain compact SUV (sport-utility vehicle) is on offer with financing for 84 months at 0.99 per cent. A Mazda CX-5 compact SUV? The offer there is 2.49 per cent for 84 months. The money’s not free, but very cheap over such a long term.
Yes, there are arguments to be made against very long loan terms – that it’s folly for consumers to lock themselves into payments over six, seven, eight or nine years. Some argue that long loan terms increase the risks of loan defaults. Others say that when buyers lock themselves into one vehicle for long terms, this can negatively affect the health of the marketplace by taking those buyers out of the cycle. So far, says Auto Source, problems associated with these issues have not surfaced in Canada.
For now and at least as long as interest rates remain low, long loan terms will remain a staple in Canada. There is a good case to be made that this is not such a bad thing.
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