Before I launch into a revealing auto finance comparison from Statistics Canada, and possibly lose your attention for good, here’s a short bit from comedian Steven Wright: “I had parked in a tow-away zone, and when I got back, the entire neighbourhood was gone.”
In 2007, only 6.4 per cent of buyers in Canada purchased a new vehicle with a payment term of 72 months or greater. Today, 40 per cent of buyers finance their vehicle over six years or more.
There was a time when you couldn’t even finance a vehicle for more than three years. More and more of us are spreading the cost of a vehicle purchase over longer and longer periods of time.
Is this a good trend? Probably not.
And this is not me lecturing about money matters, ‘cause that would be like Donald Trump scolding other guys about comb-overs.
Instead, consider the auto industry analysts over at J.D. Power and Associates, who recently noted one of the prime pitfalls of longer term financing — the greater potential for buyers to find themselves in a not-so-nice credit position known as “under water.”
Another term for it is “negative equity.” Whatever you call it, it’s a scenario where the buyer owes more on the loan than the vehicle is worth. Basically, it’s a case of your car loan payments not even keeping up with the vehicle’s depreciation, which can happen when you stretch the term out so long, to 72 months and beyond, to keep monthly payments as low as they can possibly go.
In 2007, 17 per cent of car deals were “under water,” compared with 26 per cent today.
This is obviously not a huge problem if you plan to keep the car forever, or even just past the finance period. But should you find yourself needing to sell or trade the vehicle sooner, well… then you’ll be out of pocket for the difference between what the car is worth and how much you still owe on it.
Also note that the longer the finance term, the more interest you’ll pay in total. In 2007, when the average car loan was four years, the average total cost of a vehicle loan was 107 per cent of the purchase price. J.D. Power notes that owing to today’s extended payment terms, the average total finance cost has risen to 114 per cent of the purchase price.
Vehicle purchases continue to take a bigger slice of our disposable income. In the biz, that slice is known as “share of wallet.” But monthly payment amounts on new-vehicles have been basically flat since 2007, when the average payment was $528. J.D. Power figures consumers — and dealers — are using those long-term loan instruments, to keep a lid on automobile’s “share of wallet,” at least on a monthly basis.
With so much focus on monthly payment schedules, J.D. Power also argues that, “…the MSRP has become irrelevant to new-vehicle buyers. Today’s vehicle buyers will trade tomorrow’s total cost, in order to balance the monthly checkbook.”
Again, we’re not lecturing. You’re definitely the master of your own “share of wallet,” more or less…