Auto loan debt: Introduction
Cars can mean many things to us including freedom, status, power, sex appeal or basic transportation. It also seems to mean auto loan debt. Fueled by low-interest rates, 2016 saw Canadian passenger car sales hit a record high for the third straight year. It appears that 2017 is continuing the 2016 trend; not just for car sales, but also for Canadians’ willingness to take on auto loan debt.
But, can you afford that car you’re driving? Or will it put you into debt beyond your means to repay? And in the wonderful world of debt, car debt may be bad debt. So, if you have wanted to start taking on auto loan debt but were afraid to get started, this blog may help you decide what to do.
Auto loan debt: Why may car debt be bad debt?
According to DesRosier Automotive Consultants about 85% of car purchases are by Canadians are purchasing passenger cars with debt. “In Canada, automakers are selling about 41% of vehicles with loans of at least six years or leases of at least five years”, said Mark Buzzell, chief executive officer of Ford Canada.
- A new car will lose 60% of its total value over the first five years of its life (CARFAX)
- Longer-dated loans significantly increase the chance that an owner ends up owing more than their car is worth (Financial Consumer Agency of Canada)
- The share of Canadians trading in vehicles with negative equity rose to 30% in 2015, and on average they were underwater by about $6,700 (J.D. Power)
Auto loan debt: What can be done to prevent Canadians from buying cars they can’t afford?
Ford Motor Co. is seeking to limit the growth in long-term auto loans and leases in Canada. Ford wishes to slow down consumers trying to stretch out payments for as long as eight years to afford a car. However, regardless of what Ford’s doing, low-interest rates and longer amortization makes buying cars we can’t really afford an attractive proposition. People are looking merely at the monthly payments to figure out how large and fancy a vehicle to buy. They are not considering their true needs and affordability.
Some say that auto debt is so high, we are in an auto loan debt bubble. The rating agency Moody’s obviously thinks Canada is in one when it downgraded its rating of Canada’s six largest banks.
As of February 2017, sales of luxury cars accounted for nearly 60% of Canadian vehicle sales. This is five times their normal share, according to a March 13 Scotiabank report. The reality is that we need to exercise common sense and financial restraint when purchasing any big-ticket item. And let’s not forget about using a budget to help live within our means.
Auto loan debt: What to do if you have too much debt
Are you now in debt because you purchased or leased a car you couldn’t afford? The Ira Smith Team is here to get you back on track to debt free living Starting Over, Starting Now. We can solve your problems with immediate action and the right plan for moving forward. All it takes is one phone call to book your free, no obligation consultation. Call us now.