For countless Canadians, especially newcomers, recent graduates, and those with financial challenges like bad credit or a bankruptcy history, purchasing a car is a major financial decision. Many already have an estimated monthly payment in mind that suits their budget when considering an auto loan. In recent years, the trend has been towards longer auto loan durations, with terms now often exceeding six years. In fact, 2014 data showed that 62 percent of auto loans were for terms over 60 months, with nearly 20% spanning between 73 to 84 months.
The allure of extended loan periods, for many, lies in the possibility of lower monthly payments. However, the implications of such decisions can be significant, especially when one evaluates the total interest accrued over the loan’s lifespan. Here are some vital considerations for those pondering a lengthy auto loan:
Understanding Interest Costs
Extended loan periods inevitably mean higher interest costs. The longer you’re paying off the loan, the more you’re shelling out in terms of both rate and overall interest. Toronto Car Loans, like many experts, typically advises towards a loan duration of around 60 months, if not shorter, to minimize these additional costs.
The Trap of Negative Equity
A new vehicle can lose up to 22% of its value in just its first year. Thus, at the onset of a car loan, many find themselves “underwater”, owing more than their vehicle’s market value. This discrepancy can be even greater without a substantial down payment. The longer the loan duration, the slower the journey to positive equity. Such negative equity can bind you financially, complicating scenarios where you may want or need to sell the car.
Combatting Car Fatigue
While a new car can bring immense joy and satisfaction, these feelings can fade over time. Many Canadians often find themselves longing for a new vehicle after just a few years. Historical data suggests the average trade-in age for cars is around six years. Thus, for those with a 72-month loan, the itch for a new vehicle might come even before they’ve fully paid off their current one. In such situations, leasing might offer a more economically sound solution.
Considering Resale Value
Another essential factor is a vehicle’s resale value. A car that’s only 5 years old usually fetches a better price in the Canadian resale market compared to a 7-year-old counterpart. Longer loan periods might mean that by the time you’re ready to sell, your car’s value has significantly depreciated, affecting your potential returns.
Furthermore, with the rapidly evolving automotive industry, cars are continually being equipped with newer, advanced technologies. A longer loan term may result in your vehicle becoming technologically obsolete by the time you’re ready for a new one, further decreasing its resale value.
It’s crucial for potential car buyers to understand these considerations and weigh them against the allure of lower monthly payments. Often, a shorter loan term can lead to greater financial flexibility and savings in the long run.
*Toronto Car Loans is not responsible for the accuracy of this information, and this information is for educational purposes only*