Longer loans mean lower payments and may entice people to buy more expensive vehicles.

Longer loans mean lower payments and may entice people to buy more expensive vehicles.
Photo Credit: Damian Dovarganes/Associated Press

Long-term car loans risky for consumers: watchdog

Few Canadians pay cash for a car and often they take out loans for six to eight years, a practice called risky by the Financial Consumer Agency of Canada. This independent agency of the Canadian government works “to protect and inform consumers of financial products and services.”

Consumers may buy more car than they can afford

Car loans used to last five years. The worry is that longer-term loans mean lower monthly payments may entice consumers to buy more expensive vehicles which they may not be able to afford in the long term. People with low credit scores may be subject to higher interest rates. And the agency says many consumers continue to buy 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,” says the agency’s research report.

Household debt rising

This is one of several warnings about rising household debt in Canada. In December 2015, government statistics indicated that the average Canadian household had almost $1.64 in debt for every dollar of disposable income. The Bank of Canada called this mounting debt level “the most-important vulnerability in the financial system.”

Low interest rates have contributed to the problem by encouraging families to buy more expensive properties because monthly payments are low. Banks have warned that an increase in interest rates could force many to give up their homes.

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