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Long-term loans: The fuel that’s powering Canadian car sales

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This story is part of a series we’re calling Debt Nation looking at the state of consumer debt in Canada. Look for more coverage in the coming days, including on mortgages and credit card debt.

Canadians are buying more cars than almost ever before, but a closer look reveals they’re taking longer and longer to pay them off, too.

More than half of all new car loans are currently financed for  84 months — seven years — or longer. Industry standard used to be to amortize car loans over 60 months — five years — but as low interest rates settled in, payment periods began to stretch longer and longer to make monthly payments as low as possible.

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Longer terms allow the lender make more money in interest payments off each car loan.

Interest rates on car loans can range from zero per cent to the high single digits, depending on the make and model, time of year and the duration of the loan.

Market research firm J.D. Power Inc. collects sales data from more than 1,200 Canadian car dealerships across the country, and has noticed a troubling trend.

In a nutshell, “long-term financing has exploded in Canada,” the company’s automotive expert Robert Karwel said. At one point earlier this year, 55 per cent of all new car loans were for at least 84 months.

That can be than seven years to pay off a steadily depreciating asset, and it’s a growing piece of Canada’s debt puzzle.

The figure has since inched down a little to 51 per cent as of September, Karwel says, but for comparison purposes less than 10 per cent of American car loans are stretched out over that long a period.

Most are fixed-rate loans, but even so, if Canadians are five times more likely than Americans are to have a long-term car loan, they’re five times more vulnerable down the line as the cost of all their other forms of debt creeps higher.

“People are buying more expensive cars, and that’s been facilitated by [this type of] financing, because you can spread the payment over long enough of a time,” Karwel says.

Canadians are on track to buy two million vehicles this year, but more and more people are taking seven years or more to pay them off. (Eduard Korniyenko/Reuters)

The appeal for a car buyer is obvious.

The average price of a new car in Canada last year was just over $33,000 last year. If you pay cash up front, you’d likely get to knock off quite a bit of that total in terms of dealer incentives and instant rebates.

But if you finance it over seven years or more, it’s not hard to get the monthly payment to well under $500 a month, and even a modest down payment up front would result in much lower payments down the line.

Read more stories in our Debt Nation series:

COMING UP:

  • WEDNESDAY | Full news coverage of Bank of Canada announcement on interest rates
  • THURSDAY | CBC business reporter Peter Armstrong takes a look at the current state of household debt in Canada; Don Pittis analyzes what the Bank of Canada news means for Canadians’ finances
  • FRIDAY | CBC business columnist Don Pittis explains why credit card debt can be a dangerous trap

Squeezing that same car into shorter-term loan saves money in the end but can add hundreds of dollars to the monthly payment.

Which is a big reason why B.C. resident Jakky McDonald jumped at the chance to get an 84-month loan when she bought a new Kia Forte earlier this year.

Jakky McDonald is more than satisfied with her seven-year car loan because the terms allowed her to pay off her student loan. (Glen Kugelstadt/CBC)

The 24-year-old wasn’t in a position to pay cash up front, so she knew she’d finance.

Based on what the dealer offered, she went with a seven-year payment plan, but the salesman pitched her on one extra enticement she couldn’t refuse. While checking her credit history, the salesman noticed that she had about $4,500 in student loans on her file. He suggested she roll those debt into her new zero per cent interest car loan.

“He said you might want to consider taking any other debt you might have that does have interest on it, you know, to this because it will save you money in the long run,” she recalls him saying.

She checked the fine print, and ended up doing exactly that. Six months later, she says she’d make the same call in a heartbeat. In McDonald’s case, the plan hinged on getting zero per cent on the loan.

True, she may have missed out on a few other incentives had she paid cash up front, but refinancing almost $5,000 worth of student loan debt in one fell swoop worked for her.

Albertans tend to have the biggest amount of car-related debt, partly because of the province’s penchant for expensive pickup trucks, TransUnion’s Matt Fabian says. (CBC)

“I opted for $4,500 cash back and then they wrote me a check for that,” she said. “And I just went and put it right on my loan.”

Her case clearly illustrates the selling point for consumers of some of these loans — but it’s not hard to come up with the down side.

Experts say that one of the biggest risks of such loans is that as the loan terms stretch into seven eight or even nine years, it’s not uncommon for the borrower to still owe more against the car than it’s worth, when they come to need another car in a few years time.

In financial parlance, that’s known as having negative equity, but in layman’s terms it feels a bit like having your finances turned upside down and underwater.

Dealers lure in buyers with incentives like zero per cent financing, but those enticements often come with incredibly long term payment periods and no rebates up front. (Daniel Acker/Bloomberg)

J.D. Power numbers suggest that more than 30 per cent of Canadians who trade in a car owe more on the car than it’s worth.

More often than not, that gap gets rolled into the new car loan in the form of new debt, which extends the payment plan even further and puts borrowers even more in debt when they need to do it again in a few years time. And the cycle goes on. And on. The longer the loan, the more likely it is to present a problem down the line.

“You’re just spreading that same risk over a … longer period of time,” says Matt Fabian, research director at credit reporting firm TransUnion.

While Fabian notes that delinquency rates for car loans are still low, long-term car loans are a growing piece of Canada’s debt picture — especially as Canadians are buying bigger, more expensive cars.

Most car loans come at a fixed rate, a fact that makes them somewhat insured from rate hikes to come. But that hides  the reality that hikes elsewhere can make even those car payments even hard to come up with every month.

Almost half of new car buyers trade in an old car to help finance the purchase of a new one, but almost a third of them are upside down on their old car anyway. (CBC)

“That car loan payment doesn’t increase, but if you have a variable rate mortgage and a line of credit, those do,” Fabian says.

Economist Benjamin Tal at CIBC agrees that car loans are really a matter for concern in as much as they fit into Canadians’ overall debt loads.

But he’s especially worried about people with negative equity — who owe more than their car is worth, even after years of paying it off.

Because consistently doing that means “you’re becoming more vulnerable to the risk of higher interest rates,” as he puts it.

That may sound bleak, but fortunately, J.D. Power’s Karwel says there’s an easy solution to the problem.

“For consumers at least, there’s a safety valve for all this … and the safety valve is … just keep your car. If you’re financing for 84 months, keep your car for 84 months and this problem goes away.”

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Ontario’s new automated speed enforcement explained

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(NC) To wage the war against speeding, many municipalities across Ontario have turned to automated speed enforcement. Most recently introduced in Toronto, speed cameras are a high-tech solution to reduce speeding and are considered one of the most effective ways to create safer roads and save lives.  

Recognizing police officers cannot catch all speeders, these cameras fill the gap, providing monitoring in specific locations around the clock. When a car’s speed is even one kilometre over the posted amount, it will take a picture of the offending vehicle’s license plate, using the captured photo as indisputable evidence. A ticket is then served to the vehicle’s owner, regardless of who was driving. 

With a focus on high-risk areas, Ontario’s automated speed enforcement cameras are located in two specific municipal areas: school and community safety zones. School zones are designated streets close to a school, featuring reduced speed limits as dictated by local bylaws. Community safety zones are high-risk corridors and intersections, subject to increased fines and penalties.  

While the Ontario Highway Traffic Act outlines the use of automated speed enforcement, municipalities can decide when and where to use cameras to curb speeding. The act does dictate financial penalties for speed violations captured with cameras, which vary depending on the number of kilometres caught over the speed limit.  

Speed enforcement is not new, but part of a broader, integrated road safety strategy that includes infrastructure improvements, awareness campaigns and new uses of technology. City officials hope for a halo effect, inspiring better driving behaviour across entire communities, not only in areas with cameras. A controversial topic, some critics take exception to speed cameras, labelling them as sneaky cash grabs for municipalities. Governments think the opposite. 

Safety advocate and auto insurance provider Onlia is hopeful that the cameras will provide drivers with a reminder to slow down, especially in high-risk areas like school and community safety zones.  

For those who obey the speed limit, automated speed enforcement shouldn’t change anything about your driving style, says Alex Kelly, Safety Ambassador at OnliaDrivers have fair warning as they approach areas with speed cameras, as mandatory signs provide reasonable notice of upcoming automated speed enforcement. Regardless of warnings, the best speed is the posted speed. 

You can start to understand your speeding style by downloading the insurance provider’s new safe driving app that coaches and rewards for you for safe driving habits.

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Online banking: How to protect yourself from fraud

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(NC) Since the start of the COVID-19 crisis, a growing number of consumers are regularly using mobile and online banking to paybill payments, transfer money and make purchases.

Although these tools can give you easy access to your personal finances on demand, there are also some risks involved. For instance, your banking information—such as your debit or credit card number, user name, or personal identification number (PIN)—could be stolen. If criminals have access to your online banking information, they can steal your money, which is why it’s so important to be  vigilant when you bank online.

Follow these tips to help protect your personal and banking information:

  • For your online bank accounts, use a strong password that can’t be easily guessed, and never share your user name or password with anyone.
  • Check your accounts regularly to make sure there are no transactions you didn’t make or authorize.
  • When making online purchases, never authorize a website to save your credit card information, password or other personal information. Giving websites this permission will save you some time the next time you access the site, but it poses a real threat if a hacker manages to access your information.

Most financial institutions have policies to protect you from transactions that you didn’t make.

However, you are responsible for protecting your online and mobile banking information. If you give your details to anyone—including your spouse or partner, a family member or a friend—your financial institution may hold you responsible for any unauthorized transactions in your account, and even strip you of protection from unauthorized transactions in the future.

If you suspect your information may have been compromised, change your passwords immediately, and check your account and credit card statements for anomalies and report any suspicious transactions to your financial institution.

The Financial Consumer Agency of Canada has created resources to help you protect your online banking information.

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Payday loans: Not the best way to borrow money

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(NC) Payday loans are a very expensive way to borrow money. Even if you’re struggling financially, think twice—and crunch the numbers—before getting this type of loan.

Depending on the rules in your province, payday lenders can charge fees of $15 to $25 per $100 that you borrow.

As an example, let’s say you borrow $300 for home repairs. The payday lender charges you $51 in fees, or $17 for every $100 borrowed. Your loan balance is therefore $351, which amounts to an interest rate of 442 per cent.

There can be serious consequences if you don’t repay your loan by the due date. These may include the following:

  • The payday lender may charge you a fee if there isn’t enough money in your account.
  • Your financial institution may also charge you a fee if there isn’t enough money in your account.
  • The total amount that you owe, including the fees, continues to increase.

There are better options out there

Payday loans should be your last resort to borrow money. Consider cheaper ways of borrowing money, such as:

  • Cashing in vacation days or asking for a pay advance from your employer.
  • Getting a line of credit, a cash advance on a credit card or a personal loan from your financial institution.
  • Getting a loan from family or friends.

Before getting a payday loan and to avoid getting stuck in a debt trap, consider other, less expensive ways to borrow money.

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