Canadians love their cars. And their car loans.
A new study by market research firm J.D. Power Inc. has found that Canadians are buying more cars than ever before, but also taking out longer term loans to pay them off.
J.D. Power found that more than half of all new car loans in Canada are now financed over 84 months (seven years) compared to what used to be a maximum of 60 months (five years). The study also found that Canadians are five times more likely to get a long-term car loan than Americans.
The longer term loans are being blamed on low interest rates, which have made Canadian consumers comfortable taking longer to pay off a vehicle that they purchase. Interest rates on car loans currently range from 0% to the high single digits, depending on the time of year and duration of the loan. But longer loans enable lenders to make more money in interest payments – regardless of how low the interest rate is.
"Long-term financing has exploded in Canada," wrote J.D. Power’s automotive expert Robert Karwel in the report. Earlier this year, 55% of all new car loans issued in Canada were for at least 84 months (seven years).
J.D. Power collected sales data from more than 1,200 Canadian car dealerships across the country to compile its study. The average price of a new car in Canada last year (2017) was $33,000.
Financial experts warn that one of the biggest risks of long-term car loans is that, after six or seven years, the car owner could end up owing more money than the car is worth as vehicles are a depreciating asset.
