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FCAC releases research report highlighting risks of extended-term car loans for Canadian consumers
March 8, 2016 – Ottawa – Financial Consumer Agency of Canada
Lucie Tedesco, Commissioner of the Financial Consumer Agency of Canada (FCAC), today released Auto Finance: Market Trends (PDF, 692 KB), a research report highlighting a worrisome growth in long-term car loans. Loans with terms of more than six years have become a trend in Canada, posing risks that Canadian consumers should consider carefully prior to financing a vehicle.
Because long-term car loans feature lower monthly payments, consumers are increasingly comfortable buying “more car” than they may be able to afford in the long term. Making car payments over terms of 72, 84 or even 96 months (six to eight years) is costly for borrowers who must pay interest for a longer period of time than would otherwise have been the case for shorter, more traditional loans, typically 60 months or five years. In addition, long-term loans are especially expensive for consumers with low credit scores, who may be subject to higher interest rates.
To add to this, many consumers continue buying new cars before their existing loans are fully repaid. In these circumstances, consumers put themselves in the position of having to roll the debt owing on the long-term loan into the loan for the purchase of the new vehicle, thereby potentially stepping onto an “auto-debt treadmill."
FCAC is addressing these concerns by focusing its oversight and education efforts on this market. It is ensuring that federally regulated financial institutions’ indirect lending activities, including auto loans, comply with federal legislative and regulatory requirements. The Agency is also collaborating with provincial and territorial governments to ensure that consumers receive the information they need when entering into a car loan. FCAC has also developed new online material to help consumers navigate the complexities of financing a car, understand the importance of shopping around and budgeting, and make informed decisions.
Owing in part to the allure of the lower monthly payments featured by long-term car loans Canada’s auto finance market has nearly doubled in the last eight years.
In 2015, the average new car loan had a term longer than 72 months, up from approximately 65 months in 2010.
Long-term car loans constitute approximately 60 percent of the car loan portfolios of Canada’s largest financial institutions.
Despite opting for long-term car loans, many consumers continue to change their vehicles every four years or so, while still owing on their previous vehicle. The outstanding balance on the previous loan is typically rolled into the loan for the purchase of the new vehicle.
Total transaction costs for new vehicles are rising more than twice as fast as average monthly payments, as a result of longer average loan terms.
The percentage of consumers in negative equity positions trading their cars has risen 50 percent over the past five years: from 20 percent in 2010 to 30 percent in 2015.
Auto dealers typically solicit bids from several lenders for the same consumer/transaction. These lenders typically offer dealers a commission or other incentives to get their business and consumers may not be presented with competitive offers.
“Recent trends in extended-term car loans have raised several concerns. Consumers must carefully examine their needs and their financial situation to ensure they can repay their car loans without undue strain, and with a full appreciation of the total interest charges and value of the car throughout the loan period.”
Lucie Tedesco, Commissioner, Financial Consumer Agency of Canada
“Consumers and auto dealers tend to focus on the monthly loan payments required for a car purchase. Few take issues such as negative equity into account when choosing between different car loan terms. This is one of the reasons why FCAC will work with stakeholders to make sure that consumers are getting enough information and know which questions to ask.”
Brigitte Goulard, Deputy Commissioner, Financial Consumer Agency of Canada
“Shopping around and asking questions when looking at different financing arrangements when purchasing a vehicle should be just as important as researching the type of car you want. That is why FCAC has put together information to help people through this important financial decision.”
Jane Rooney, Financial Literacy Leader, Financial Consumer Agency of Canada
- Auto Finance: Market Trends (PDF, 692 KB)
- Financing a car
- Statement by FCAC Commissioner Lucie Tedesco
- Budget calculator
Financial Consumer Agency of Canada
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