Seven of 10 Canadians sign up for a loan term of 72 months or longer – sometimes as long as 96 months or eight years. Good idea, bad, or something else?
– Source: J.D. Power and Associates
Perhaps it is the third option. Loans stretched out over long repayment periods simply make common sense for many car shoppers who want or need a lower monthly payment, says auto analyst Dennis DesRosiers of DesRosiers Automotive Consultants.
“If a consumer owns their vehicle for 84 or 96 months — very common– what’s wrong with the lending term being that length?” he asks in a note to clients. “It may cost more (in) interest, but most consumers have a monthly budget for their vehicle and view their payment plan as a life-long endeavour — essentially a monthly payment for life.”
That payment is more affordable still when combined or stacked with some of the “free” money sloshing through the marketplace. Virtually all car makers in Canada offer loans at very low interest rates and in
– Source: J.D. Power and Associates
many cases it’s possible to get a deal at 0.0 per cent. Combine the deals and you get a lower price, financed by no-cost money.
Kia, for instance, will give you a $750 factory incentive on the 2016 Soul wagon and it can be stacked with 0.0 per cent financing for up to 84 months or seven years. Kia Canada also offers that $750 sales sweetener on a 60-month lease at 0.0 per cent.
– Source: J.D. Power and Associates
While the while the weekly lease payment at $32.66 is about 25 per cent lower than the lower payment at $45.18 ($0.0 down), the best deal is very likely the long-term loan, tax considerations and individual circumstances aside.
As DesRosiers notes, “more than half of consumers who lease in Canada buy their vehicle out at the end of their lease. So they jump from a four-year lease into a two- to four-year year loan. Why use two debt instruments when you can do it in one?”
Especially is the interest rate for 84 months is a big, fat 0. And, indeed, low-interest loans stretched over six, seven, even eight years have become commonplace in Canada. The relatively lower costs associated with a longer-term largely explain the decline in leasing’s popularity from a high of 40-60 per cent of the marketplace at the height of its popularity in year past to 25 per cent, notes data from J.D. Power and Associates.
Leasing, notes DesRosiers, “is unlikely to go back to the 40-plus range experienced up until the summer of 2008,” he notes. “Longer loan terms and their lower monthly payments offset much of the monthly payment advantage of leasing.”
– Source: J.D. Power and Associates
This represents a major shift in buying patterns. J.D. Power and Associates points out that 14 per cent of vehicle purchases in 2007 were financed for a term of 72 months or longer, compared with 66 per cent in 2014 and 71 per cent in 2016.
J.D. Power is less sanguine about 72-, 84- and 96-month loan terms than DesRosiers. J.D. Power believes that “long-term finance deals today represent a tremendous — and potentially unsustainable — portion of vehicle purchase activity.” One reason why: negative equity.
Today, notes J.D. Power, nearly 30 per cent of all trade-ins were “under water,” or worth less as a used vehicle than the outstanding amount left on the loan. In 2009, just 16.6 per cent of trade-ins where in negative equity-land. As loan terms stretch, more and more Canadians may find themselves driving a vehicle whose value versus the outstanding loan makes them uncomfortable or worse.
“In short,” says J.D. Power in a research note, “nearly one-third of vehicle owners in Canada could be making payments on cars they no longer own.” Yikes!
So it makes good sense to envision what it will be like to be locked into paying off today’s new ride six, seven or eight years from today.
Aside from loan terms and interest rates, the savvy buyer is wise to look closely at what is often substantial dealer incentive money which can be combined with any available factory offers.
Yes, there are deals to be had, though if it’s a financed deal, imagine making that monthly payment until 2020 or beyond. While you do, consider longevity.
Research from DesRosiers Automotive Consultants shows that the average expected useful life of a vehicle is nearly 400,000 km, or perhaps as long as 20 years at an average of 20,000 km of driving a year. Truth is, survival rates have increased significantly over the last three decades, notes Dennis DesRosiers in a note to clients.
“For instance, in the year 2000 only, 33.7 per cent of vehicles survived 15 years of ownership. Today some 54.0 per cent of vehicles survive 15 years of ownership,” notes DesRosiers.
Yes, the quality story is very real in the auto industry. Consider this, says DesRosiers: in 1990, Canada’s roads were filled with four million vehicles older than 10 years; in 2010, eight million vehicles on Canada’s roads were older than 10 years. Today’s buyer can assume that the shiny ride in a showroom now might still be doing its work in 2035. Yes, 2035.
This explains the growing popularity of six, seven or eight year loan terms.
“Since a vehicle holds its value so well and is still a very enjoyable and reliable ride well into its ownership cycle, the average length of ownership of a vehicle, if it was bought new, has increased,” notes DesRosiers, adding, “Now that they (vehicles) last a lot longer, loan repayment schedules have followed suit.”
One takeaway: if you choose to stretch out your “deal” in payments over six, seven or eight years, by year nine when you’re loan-free, that vehicle will still have perhaps another six, seven, eight or nine years of serviceable life in its tank.
2015 Soul
Seven of 10 Canadians sign up for a loan term of 72 months or longer – sometimes as long as 96 months or eight years. Good idea, bad, or something else?
– Source: J.D. Power and Associates
Perhaps it is the third option. Loans stretched out over long repayment periods simply make common sense for many car shoppers who want or need a lower monthly payment, says auto analyst Dennis DesRosiers of DesRosiers Automotive Consultants.
“If a consumer owns their vehicle for 84 or 96 months — very common– what’s wrong with the lending term being that length?” he asks in a note to clients. “It may cost more (in) interest, but most consumers have a monthly budget for their vehicle and view their payment plan as a life-long endeavour — essentially a monthly payment for life.”
That payment is more affordable still when combined or stacked with some of the “free” money sloshing through the marketplace. Virtually all car makers in Canada offer loans at very low interest rates and in
– Source: J.D. Power and Associates
many cases it’s possible to get a deal at 0.0 per cent. Combine the deals and you get a lower price, financed by no-cost money.
Kia, for instance, will give you a $750 factory incentive on the 2016 Soul wagon and it can be stacked with 0.0 per cent financing for up to 84 months or seven years. Kia Canada also offers that $750 sales sweetener on a 60-month lease at 0.0 per cent.
– Source: J.D. Power and Associates
While the while the weekly lease payment at $32.66 is about 25 per cent lower than the lower payment at $45.18 ($0.0 down), the best deal is very likely the long-term loan, tax considerations and individual circumstances aside.
As DesRosiers notes, “more than half of consumers who lease in Canada buy their vehicle out at the end of their lease. So they jump from a four-year lease into a two- to four-year year loan. Why use two debt instruments when you can do it in one?”
Especially is the interest rate for 84 months is a big, fat 0. And, indeed, low-interest loans stretched over six, seven, even eight years have become commonplace in Canada. The relatively lower costs associated with a longer-term largely explain the decline in leasing’s popularity from a high of 40-60 per cent of the marketplace at the height of its popularity in year past to 25 per cent, notes data from J.D. Power and Associates.
Leasing, notes DesRosiers, “is unlikely to go back to the 40-plus range experienced up until the summer of 2008,” he notes. “Longer loan terms and their lower monthly payments offset much of the monthly payment advantage of leasing.”
– Source: J.D. Power and Associates
This represents a major shift in buying patterns. J.D. Power and Associates points out that 14 per cent of vehicle purchases in 2007 were financed for a term of 72 months or longer, compared with 66 per cent in 2014 and 71 per cent in 2016.
J.D. Power is less sanguine about 72-, 84- and 96-month loan terms than DesRosiers. J.D. Power believes that “long-term finance deals today represent a tremendous — and potentially unsustainable — portion of vehicle purchase activity.” One reason why: negative equity.
Today, notes J.D. Power, nearly 30 per cent of all trade-ins were “under water,” or worth less as a used vehicle than the outstanding amount left on the loan. In 2009, just 16.6 per cent of trade-ins where in negative equity-land. As loan terms stretch, more and more Canadians may find themselves driving a vehicle whose value versus the outstanding loan makes them uncomfortable or worse.
“In short,” says J.D. Power in a research note, “nearly one-third of vehicle owners in Canada could be making payments on cars they no longer own.” Yikes!
So it makes good sense to envision what it will be like to be locked into paying off today’s new ride six, seven or eight years from today.
Aside from loan terms and interest rates, the savvy buyer is wise to look closely at what is often substantial dealer incentive money which can be combined with any available factory offers.
Yes, there are deals to be had, though if it’s a financed deal, imagine making that monthly payment until 2020 or beyond. While you do, consider longevity.
Research from DesRosiers Automotive Consultants shows that the average expected useful life of a vehicle is nearly 400,000 km, or perhaps as long as 20 years at an average of 20,000 km of driving a year. Truth is, survival rates have increased significantly over the last three decades, notes Dennis DesRosiers in a note to clients.
“For instance, in the year 2000 only, 33.7 per cent of vehicles survived 15 years of ownership. Today some 54.0 per cent of vehicles survive 15 years of ownership,” notes DesRosiers.
Yes, the quality story is very real in the auto industry. Consider this, says DesRosiers: in 1990, Canada’s roads were filled with four million vehicles older than 10 years; in 2010, eight million vehicles on Canada’s roads were older than 10 years. Today’s buyer can assume that the shiny ride in a showroom now might still be doing its work in 2035. Yes, 2035.
This explains the growing popularity of six, seven or eight year loan terms.
“Since a vehicle holds its value so well and is still a very enjoyable and reliable ride well into its ownership cycle, the average length of ownership of a vehicle, if it was bought new, has increased,” notes DesRosiers, adding, “Now that they (vehicles) last a lot longer, loan repayment schedules have followed suit.”
One takeaway: if you choose to stretch out your “deal” in payments over six, seven or eight years, by year nine when you’re loan-free, that vehicle will still have perhaps another six, seven, eight or nine years of serviceable life in its tank.
2015 Soul
About the Author / Jeremy Cato
Related Posts
FREE eBook: Swimming with the Showroom Sharks
Jeremy Cato, three time Automotive Journalist of the Year, gives you insider's insights on how to save $5,000 or MORE on your next new vehicle.
@catocarguy