Regina Leader-Post

Longer-term car loans are attractive, but a terrible idea

Consumers nowhere close to paying off one vehicle before they get into next one

- LORRAINE SOMMERFELD Twitter: @TweeetLorr­aine contact@lorraineon­line.ca lorraineon­line.ca

Ever been in an upside-down car?

More and more of us are doing it every day — driving a car that is worth less than what we owe on it. It used to be an initial dump bump in the first year of owning a car; the full cost of the loan straddling the hit you’d take for depreciati­on as you drove it off the lot. However, as we increasing­ly see the length of car loans sprawl beyond reason, we’re instead seeing more consumers come nowhere close to paying off one car before they get into the next one. Not to worry, say the sellers and the financial institutio­ns. Let us help you out with that. Sign here.

The very first thing you’ll be asked at a car dealership as you peruse the showroom is, “how much do you have to spend each month?” Don’t answer that question. Becoming a monthly payment junkie, as OMVIC (Ontario Motor Vehicle Industry Council) calls it, can doom you to budget chaos and a compromise­d credit rating. The math is actually easy; it’s the emotion that’s hard. If you have $25,000 to spend on a car, and you enter into what used to be an industry-norm car loan for five years, your payment will be about $416 a month. Your problem — and the seller’s fun — begins when you fall in love with a more expensive car.

They keep your eye on that magic four hundred-something monthly number while they shift the dials everywhere else. All of a sudden you’ve got a seven-year loan for a car that costs $35,000. But you’re still only paying

$416 a month! Everybody wins! Everyone except the consumer who actually only had a $25,000 budget for a car.

“People will do a ton of research on what car to buy,” explains OMVIC’s director of communicat­ions, Terry O’Keefe. “But often, they do very little research on how to pay for it.”

OMVIC is a sales regulator, not a finance regulator. But consumer protection in the auto-buying industry necessaril­y has to take into considerat­ion how those same consumers are being made aware, influenced or even misled when it comes to the actual purchase.

Financing your new purchase at the dealer probably means you’re using the OEM finance department, or a mainstream lender like a bank. My car was financed through Scotiabank, though I have no other dealings with them. You should know that a dealer gets a fee from placing that deal, which means you should have a chat with the people at your own bank before you finance a car. They might have a better offer.

How many owners actually owe more than the car is worth? “According to many dealers, more than 50 per cent of customers with trade-ins have negative equity,” says O’Keefe. This leads to a cycle of rolling over the outstandin­g amounts into fresh loans and the cumulative effect of doing this can mean you’re being crushed by a highend loan to drive a subcompact car. O’Keefe reports seeing one contract that had the buyer still owing $25,000 more than the actual value of the car.

But who would finance such craziness? After all, a car loan is tethered to the value of the vehicle it’s purchasing, right? Ah, no.

“We’ve seen, in one case, a lender authorize sellers to go to 180 per cent of the value of the purchase,” O’Keefe says.

If OEMs and banks are OK with pouring water onto the top of this wheel, it can only be because they’re benefiting from it.

Sales of new cars remain in record territory, and the orgy shows no signs of stopping soon. We’re buying more vehicles and we’re buying bigger ones.

O’Keefe acknowledg­es there are times when extended-term financing can make sense.

“If you’re not a high miler, if you keep your car a long time and if you can get zero-per cent terms, it can make sense.” But the pitfalls if you fall outside of that category can be onerous. If you have an eight-year loan — sorry, 96 months — and you’re a commuter doing 40,000 kilometres a year, you’ll be in a situation where you’re making payments on a vehicle that, with around 300,000 km on it, will be well outside of most warranties and needing more expensive upkeep.

The Motor Vehicle Dealers

Act (MVDA) requires sellers to accurately and clearly show negative equity in a transactio­n. This means a seller shouldn’t, of their own suggestion or at a buyer’s behest, fudge the numbers to secure funding. This isn’t about getting a helping hand to get into the ride you really, really want. It’s about you ending up owing far more than the vehicle is worth, and being stuck with it.

There are programs you can pay for, at the time of sale or via your insurance, that will bridge

People will do a ton of research on what car to buy. But often, they do very little research on how to pay for it.

the gap between what you owe and what is paid out in the event of a writeoff; the problem is they’re limited (usually the first year) as well as limiting: they don’t cover the loss you experience if your car is hit and fixed yet is still considered damaged goods when you go to sell. If your car is wrecked and you still owe more than it’s worth, you’ll be stuck paying your car loan after the insurance money falls short and you still won’t have a replacemen­t ride.

It was negative equity that trashed the American housing market a few years ago, when low interest rates and Wall Street criminals were acting like a twopronged shoehorn to get everybody into a house whether they could afford it or not. The “or not” turned into disaster, and yet here we are, entering a similar era in the auto industry.

Buy the car you can afford, not the one a dealer, or by extension their preferred lenders, tell you to buy.

 ?? ISTOCK ?? When buying a new car, make sure to base the cost on what you can afford overall and not just the monthly payment.
ISTOCK When buying a new car, make sure to base the cost on what you can afford overall and not just the monthly payment.

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