The story on long-term auto loans

Long-term auto loans may not be a bad idea.

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From the June 2014 issue of the magazine.

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Broker

Q: “Is it really so bad to get a seven- or eight-year auto loan, given that interest rates are so low?”

—Melanie Lacroix, Toronto

A: Low interest rates—as low as 0% for 84 months—have made it possible to extend the length of car payments to unforeseen lengths. Consumer finance expert Eric Brassard says at interest rates below 3% you shouldn’t worry about the term of a loan—but you should invest the savings from the lower monthly payments instead of spending it on something else! One concern with long auto loans is if you decide to trade the vehicle early, say in the fifth or sixth year, you will owe more money than the market value of your vehicle. That’s called being “upside down” in the car business, and can begin a costly cycle of financing the unpaid balance on the purchase of your next vehicle.

George Iny is the president of the Automobile Protection Association.Send him your automotive questions at ask@moneysense.ca 

2 comments on “The story on long-term auto loans

  1. Thanks for sharing George. Quick question: I assume we’re dealing with financing for a new car in this case. Are there any circumstances that you’re aware of where financing a new car purchase would be recommended over buying a used vehicle (especially with cash). I’ve personally never seen such a scenario but am curious if you’ve ever encountered any special cases where it made financial sense. Thanks!

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  2. One major caveat: If you NEED to finance the loan over that long (i.e. you wouldn’t be able to afford the payments if they were financed over say 4 years), then you are buying too much car. The other problem with long financing periods is that you may never get a rest period when you are without a car loan and therefore miss the opportunity to save up in advance of the next purchase. You’ll always be running on the payment treadmill.

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