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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.

What does it mean to have good financial literacy? Being financially literate means having the knowledge to make decisions that will positively impact your financial health. As noted in the Relation between Financial Literacy, Financial Wellbeing and Financial Concerns, "the higher your financial literacy the greater your financial well-being." Tracking spending, budgeting, saving, and borrowing responsibly are typical behaviours that characterize people of high financial literacy. Here we'll go over how these behaviours affect financial literacy and thus, financial well being.

Controlling Your Finances With a Budget

Budgeting is a tool that can help you better understand your financial state. It creates a detailed image of your income and expenses, allowing you to allocate your resources accordingly and show you where you can save money. Moreover, according to the 2019 Canadian Financial Capability Survey (CFCS) commissioned by the Financial Consumer Agency of Canada, Canadians who budget were able to save money, manage their bills and control their monthly cashflow better than those who didn't. This can be seen in a survey we conducted (Financial Literacy vs. Financial Well-Being And Credit-Constrained Canadians) where we questioned credit-constrained Canadians with poor credit about their financial knowledge and credit habits. We found that 66% of respondents did not budget.

Saving For Emergencies

Furthermore, in our study, respondents who portrayed signs of poor financial literacy also did not save for emergencies (72%). As expected, people who did not save were ill-prepared for emergencies or unexpected expenses. This may be why 25% of respondents who loan stacked used the additional loan to cover an emergency. Financial literacy can help people understand how to manage their money more efficiently, spend more responsibly, and ultimately save more aggressively so that they may cover unexpected expenses and emergencies without having to take on debt. 

Tracking Your Spending

When you budget, tracking your spending is part of the process. Knowing where your money is going and coming from is an important part of improving your financial literacy and financial well-being. As mentioned, in our survey, respondents consisted mainly of credit-constrained individuals with low credit scores, which are telltale signs of poor financial health. That being said, our study found many did not track their spendings (43%), budget (66%), or save for emergencies (72%), key behaviours people of high financial literacy engage in.

By tracking your spending, you can learn about how your money moves and be able to identify key spending issues. Once you are aware of the issue, you can then take action to bring about good change to your financial health. For example, you may find that your social obligations are taking a huge chunk of your income or that your car expenses like maintenance, gas, and repairs cost more than you can afford. With insights like these, you can create a strategy to limit those expenses.

Understanding Borrowing Costs

There are three main factors that affect the cost of a loan: interest, loan term, and principal. Understanding how these three factors impact the cost is essential in making good borrowing decisions. Borrowing without a proper understanding of the costs can leave you with unaffordable payments, high interest, and too much debt to manage on your own.

With borrowing being an integral part of our lives as we age, it makes sense that people with high financial literacy would have a greater financial well being as they have the knowledge to make good borrowing decisions. Taking a look at our survey, we notice that only 44% of Canadians who are credit-constrained, a sign of poor financial well-being, could properly identify the factors that affect the cost of a loan. As such, being educated on these basic factors will not only help you improve your financial literacy but will, in the end, allow you to make better financial decisions.

Bottom Line

Your financial well-being can undoubtedly affect the quality of your life. Poor financial literacy can lead to poor savings, poor financial control, and overall leave you feeling defeated about your financial situation. But you can improve all this by increasing your financial literacy through good financial behaviours as mentioned. Reading and asking for advice are also important practices that can help you be more aware of how your decisions and habits affect your finances. Ultimately, gaining high financial literacy will help you manage your money responsibly and thus lead you to greater financial well-being. 

Debt Consolidation in Canada – Is a debt consolidation loan the right solution for you?

What are the advantages of a Consolidation Loan?

  • Protect your credit rating for the future
  • Pay less interest
  • Make only one monthly payment
  • Get out of debt sooner

What is Debt Consolidation?

We have collected information from both of the consumer reporting agencies (credit bureaus), as well as our own research to provide a full picture on credit files and credit scores, including those little known “insider” secrets.

Topics at a glance:

  1. What information is kept on my credit file?
  2. How long is information kept on my file?
  3. What is a credit “score”?
  4. How can my credit score affect my life?
  5. What factors affect my credit score?
  6. How do I raise my credit score?

Compare Your Debt Free Solutions

Do you worry that you may be on the road to bankruptcy? If your debts are becoming more than you can handle, there are several options available to help you.

Bankruptcy generally should be considered a last resort, although for some, depending on the circumstances, it may be the only solution.

Let's examine the different debt solutions available to turn your finances around, and help choose which one will work best for you.

What is a payday loan?

A payday loan, or payday advance, is a short-term loan of usually 14 days, which you promise to pay back, plus fees, after you receive your next paycheque. The loan is often between 30-50% of the amount of your paycheque.

To qualify for a payday loan, you must provide proof that you have a regular income, a permanent address and a bank account. You will have to sign a loan agreement which states the loan interest, fees, and due date. Most of the time you will need to provide a post-dated cheque for the full loan amount including all fees and interest, or sign a form for a pre-authorized debit of your account on the loan due date.

How much do payday loans cost?