Solutions for your financial challenges

Is Your Car Payment Preventing You From Getting Ahead?

Not too long ago, the average car loan was amortized for five years, never longer. But, somewhere between the American financial crisis and today, car loans can now be amortized for significantly longer. In fact, according to an article written by CBC News, "More than half of all new car loans are currently financed for 84 months — seven years — or longer."

Furthermore, according to data from J.D. Power, between 2010 and 2015 the average monthly car payment rose from $522 to $542. Not only are Canadians extending their repayment terms but they are also choosing more expensive vehicles and thus taking on monthly payments that could be putting them in serious financial risk.

Why Are Canadians Choosing Unmanagable Car Loans?

This all begs the question; why are Canadian consumers choosing car loans that are putting financial stress on them now with the potential to cause further issues down the line?

It's Easier to Finance a New Car vs a Used One

Unfortunately, the reality of the situation is, it's easier for the average Canadian consumer to get approved for financing on a new car than a used one. The reason for this is because lenders know exactly what a new vehicle is worth, determining the value of a used vehicle is more difficult.  And if there is one thing that is certain, it's that a brand new car costs more than its used counterpart. Not to mention all the additional costs that come along with new cars; extended warranties, backup camera, sunroofs, etc.

We Aren't Thinking About The Long Term Consequences (or Our Long Term Goals)

The problem with a $500 car payment or an 84-month term is that they can seem like good decisions when you only think about how they affect your monthly finances. But it's the long term consequences that can cause serious problems.

While you may have the cash available to cover a $500 car payment every month, the benefit of taking that money and investing it or saving for an emergency greatly outweighs the convenience you get from driving a new car. Cut your car payment by a third and you'll have a couple of hundred dollars every month to invest for your retirement as well as put toward an emergency fund. You'll also be less likely to rely on credit to deal with an unexpected expense which can cause unnecessary debt.

Choosing an 84-month car loan means the monthly payments will be lower and therefore require less of your monthly income. For most consumers, this is very appealing. You can get the car you want, maybe something new and slightly out of your price range for a more affordable monthly price. But in the end, you'll be paying way more than what the car is worth and you'll be in debt for longer. Both of which make saving for the future and dealing with other expenses difficult.

Instant Gratification

Purchasing a new car is a great feeling, especially if you've spent years driving less than reliable hand-me-downs. Heading to a dealership, choosing the car you've always wanted, and qualifying for financing is often not that difficult. The auto industry is all too eager to get you behind the wheel. But just because it's possible to finance a $30,000 car, doesn't mean you should. When it comes to serious expenses like cars, we need to be making calculated decisions based on long-term goals and not on short-term gratification.

What You Need to Consider When Taking on a Car Loan

The fact of the matter is, most Canadian adults need a vehicle to get to work, purchase groceries for their families, and drive their children around. Having a car loan isn't the problem, it's having the wrong car loan that causes issues. When thinking about financing a car, you need to consider all aspects of the loan as well as how those aspects will affect your finances now and in the future.

Interest Rate

Just because you can afford the monthly payments doesn't mean you shouldn't consider the interest rate you're being charged. We all know that a higher interest rate increases the cost of borrowing, so make sure you're being offered one that is competitive.

Loan Term

As we discussed above, more than half of Canadian car loan terms are 84-months or longer. This is far too long, as the longer-term will only make your total cost of borrowing more expensive. Choosing a vehicle that you can afford to pay off within three or four years should be your goal. 

Additional Fees and Add-Ons

Often times, dealerships may not break down all the costs associated with purchasing a certain vehicle. This means you may not be aware that the sunroof you wanted or the bumper to bumper extended warranty increased your monthly payment by $100 or made it so you had to choose an 84-month term. Make sure you understand how all the fees and add-ons affect the cost of your loan.

Monthly Payment

In the end, you need to be able to comfortably afford your monthly payment. Just make sure you understand how that monthly payment was calculated.

Total Cost of Borrowing

At the end of your term, once you've made all your payments and own your car, how much will you have spent?

The Bottom Line

Vehicles are necessities for most Canadians, but the insurmountable debt doesn't need to be. Choosing an affordable used vehicle, saving up for a significant down payment, and finally choosing a loan term that is less than 84-months should be the goal of all Canadians looking to purchase a vehicle.

Reminder to the Changes from Consumer Protection BC

New debt settlement laws will protect consumers

VICTORIA – Enhanced protections for B.C. families, particularly those in financial distress, are at the heart of legislative changes introduced today by the B.C. government.

The Province is taking action to regulate the debt settlement industry with amendments to the Business Practices and Consumer Protection Act (BPCPA). If passed, these amendments will prohibit debt settlement companies from charging fees until both the debtor and creditor have approved a debt repayment agreement. These amendments will also lay the foundation for additional new rules to safeguard consumers which government aims to bring into effect in fall 2015.

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Protecting Yourself from Fraud – And the Bank

In Canada, you are innocent until you’re proven guilty.  It would appear that our banking system has forgotten this simple fact.

Lyndsay Passmore (see story in The Province)  had 4 credit cards stolen.  When she noticed them missing, she contacted the appropriate banks.  In the interim between the cards being taken and her reporting them stolen, the thieves had taken approximately $15,000 in cash advances and charges.  Her bank, while absorbing some of the charges, tried to put Ms. Passmore on the hook for $4000, citing the fact that her Personal Identification Number (PIN) was inputted correctly the first time (which it seems meant to the bank that the person(s) who took her cards knew her PIN).  Ms. Passmore’s example raises so many interesting points, but also so many questions:

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Debt and Bank Fraud

Today there is good and bad news.

The good news came from a StatsCan report about all of the household debt in Canada that many  experts have been complaining about – how Canadians have been accused of being bad money managers but guess what? This report confirms that we are not broke and precariously dangling from a cliff of troublesome household debt, but quite the opposite. Canadians have significant assets to back all of the debt – and more. There is a net-worth surplus.

As published recently by the Vancouver Sun, a former chief economic analyst for Stats Can, Philip Cross, revealed that two-thirds of the $1.8 trillion in household debt were mortgages.

Finally someone agrees with what I’ve been saying for many years.

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