Why longer car loans should worry you

After 5 years, chances are you’ll owe more than the car is worth

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From the Summer 2014 issue of the magazine.

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Thanks to interest rates as low as 0%, Canadians are taking on longer car loans. In fact, it’s not unheard of to see payments stretched out to 96 months or eight years, says Car Help Canada’s Mohamed Bouchama. Even though car prices are rising, “people love the low monthly payments,” he says. The problem is when you go to trade in your car after four or five years and find out you owe more in payments than what the vehicle’s worth. “That’s called negative equity,” says Bouchama.

Why longer car loans should worry you

Why longer car loans should worry you

Source: J.D. Power & Associates

5 comments on “Why longer car loans should worry you

  1. What is that graph supposed to show? The axis are poorly labeled, and not referred to in the article, so I’m left to guess. What is “5.9 years!” supposed to be?

    Reply

    • The Y-axis is average finance term, in months, the X-axis is the year the loans were issued.

      Reply

  2. What is this article about? $10 000 with 0% interest still 10k minus whatever you have paid against this loan!

    Reply

    • You are right, but the article is about the balance of 10,000 minus low payments during the period you own your car going to be higher than what you can sell the car for.

      Reply

  3. Your statement about the value of the car is flawed. If you buy a car with a low payment over a period of time, then the first year of payments do not reflect the price of the car. So you bought a $30,000 car with a loan payment over 8 years. At the end of the 1st year you have paid only $3,750 for that year. Therefore you are driving a $30,000 car for $3,750. After the 1st year the depreciation value of the car drops, but still, the cost of the car to you is only $3,750. Keeping this in mind, at the start of your payments the value of the car is greater then the cost you are paying towards the car. As time goes by and the depreciation value of the car becomes greater, then the value of your payments will decline till the value of the car and the value of payments equals out. After that, then the value of the payments will be greater then the value of the car. Regardless of the time frame, the cost of a long term debt will be the same whether you buy the car out earlier or later.

    On a side note, I find that the way we view the value of a car over time is flawed. You can buy a used car that has high millage but is well kept in regards to its servicing record for the same price as a car that is not well serviced but has the same miles. A cars value should not be based on its age or mileage driven, but how well the car has been serviced in its history.

    Reply

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