A Guide to Buying a Car Without Getting Buried in Debt
Canada’s Financial Consumer Agency releases tips to avoid getting swamped by a long-term car loan
Buying and owning a car isn’t cheap. There’s the initial purchase, fuel, car insurance and maintenance required. It adds up quickly and many drivers look for ways to make car ownership less of a strain on the wallet.
Long-term car loans may look like a more affordable way to finance the car of your dreams, but they’re burying many Canadians in debt, according to the Financial Consumer Agency of Canada. The federal government’s consumer watchdog has just published a new guide to help Canadians buy a vehicle without getting caught on a “debt treadmill.”
“As much effort should be put into shopping for your car financing as shopping for the car itself," said Lucie Tedesco, commissioner of the Financial Consumer Agency of Canada.
Tedesco is advising car buyers to think twice before signing up for a six, seven, or even eight-year car loan.
“That's a stretch from the traditional loan of five years or less. I encourage consumers to use the information we have developed to help them determine how much car they can truly afford and the financing option that best suits their needs,” she said.
The problem with long-term car loans, according to the FCAC, is each year that’s added to a loan means more interest is paid in the long run. Since most cars only depreciate in value, this means while your monthly payments on your car may be lower you’re spend much more money on it in the end.
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Trading in = more debt
Many Canadians end up trading in their car after four years. If you do that, but took out a seven-year car loan, you’re still on the hook for the remaining three years of payments.
Some lenders will allow you to roll those remaining years of payments into your new car loan. The end result is one giant, super loan.
“That means consumers could find themselves deeper in debt, owing much more than their car is worth, and essentially making payments on two cars,” according to the FCAC.
The FCAC has a few tips to keep in mind when financing a car, all to minimize long-term debt:
- Create a realistic budget so you know how much you can afford to spend on a car.
- Anticipate how many years you'll likely keep the car, and what that means for the loan term.
- Ask your dealer and your bank for financing options.
- Compare costs, negotiate and shop around for the best financing possible.
- Choose the shortest-term loan your budget will allow.
The FCAC also says long-term car loans have been boosting the average Canadian’s household debt load. It says keeping its tips in mind should hopefully keep Canadians from getting buried in car debt.
“Empowering consumers with the information they need when they are about to make one of the biggest purchases of their lives assists them in ensuring that they are making the right decision according to their needs,” said Jane Rooney, a financial literacy leader with the Financial Consumer Agency of Canada.
Infographic Source: Financial Consumer Agency of Canada
Buying a new vehicle? Keep in mind the car insurance payments too.
In addition to shopping around for your car and your payment options, you should keep in mind the cost of car insurance too. Budgeting for one and not the other won't prepare you for the costs of car ownership. Get the full picture. Compare quotes at Kanetix.ca to ensure you are getting the best insurance rate for your new wheels.