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Globe Drive Does stretching out a car loan make financial sense?

Most Canadians (65 per cent) who borrow to buy a vehicle stretch out their payments to six years or more and even then the average loan payment is a hefty $490, according J.D. Power and Associates.

So here's the question: is it a good idea or a bad one for so many consumers to lock into making car payments for six, seven, eight years?

The evidence suggests good, or at least not bad. Here's why.

First, the ride you buy today is likely to be useful and functioning for the next 15 years or more, according to research from DesRosiers Automotive Consultants. DesRossiers' data suggest you'll get 308,000 km out of a new ride bought today. At 20,000 km/year, that's 15 years. Thus, even if you make payments for the first six to eight years of ownership, you can choose to be payment-free for the last seven to nine.

Second, after making car payments for, say, seven years, the vehicle in your driveway will still be worth quite a lot. DesRosiers president Dennis DesRosiers says the research shows it's a myth that vehicles lost half their value when drive off the dealer lot. The reality is a vehicle depreciates 10-20 per cent when it becomes yours, then 10-15 per cent each year thereafter.

"Overall, it is not uncommon for vehicles to hold close to 50 per cent of their value into years five to seven of their ownership cycle," says DesRosiers. Thus, even if you opt for a seven-year loan, you'll still have something of value to drive every day when you've reached the payment-free point.

How valuable? The average passenger car transaction price, notes DesRosiers, was $27,563 in 2014. If you're average, even after making payments for seven years and getting plenty of service out of your car, your ride will be worth in the neighborhood of $13,000-$14,000. For consumers worried that their car will be worthless after 72, 84 or even 96 monthly payments, there is comfort to be found in how well vehicles hold their value.

The reality of the new vehicle marketplace today is that consumers are acting quite sensibly or at least realistically when stretching out payments for many years.

"If a consumer owns their vehicle for 84 or 96 months -- very common -- what's wrong with the lending term being that length?" asks DesRosiers. "It may cost more interest but most consumers have a monthly budget for their vehicle and view their payment plan as a life-long endeavor…essentially a monthly payment for life."

Except, of course, consumers today can secure vehicle loans with interest costs at historic lows. Even loans of 84-month terms can be had at interest rates less than two per cent. This is point three for the case that long loan terms are not such a terrible thing, but rather in some instances a positive.

A new Honda Accord coupe, for instance, can be had with 1.99 per cent financing for 84 months or a GMC Terrain compact SUV (sport-utility vehicle) is on offer with financing for 84 months at 0.99 per cent. A Mazda CX-5 compact SUV? The offer there is 2.49 per cent for 84 months. The money's not free, but very cheap over such a long term.

Yes, there are arguments to be made against very long loan terms – that it's folly for consumers to lock themselves into payments over six, seven, eight or nine years. Some argue that long loan terms increase the risks of loan defaults. Others say that when buyers lock themselves into one vehicle for long terms, this can negatively affect the health of the marketplace by taking those buyers out of the cycle. So far, says DesRosiers, problems associated with these issues have not surfaced in Canada.

For now and at least as long as interest rates remain low, long loan terms will remain a staple in Canada. There is a good case to be made that this is not such a bad thing.

Deals of the Week consulted with www.unhaggle.com, Car Help Canada, www.carcostcanada.com, and other sources on these offers. As usual, pricing information here is subject to change and dealer discounts vary, so consult your dealer for all the final details, including expiry dates for all offers.

Mazda

2016 Mazda CX-5 GS AWD 6AT

  • MSRP: $31,246
  • Freight, dealer prep, air conditioning tax: $2,030
  • Dealer discount (estimated): $1,257
  • Factory discount: $1,000 (manufacturer incentive)
  • Loyalty discount: $500
  • Taxable subtotal: $30,519
  • Total price with 13 per cent HST: $34,486.47
  • A $500 factory discount and any negotiated dealer discounts are available with zero per cent financing for 48 months, 0.9 per cent for 60 months or 2.49 per cent for 84 months. Factory incentives are not available with lease rate offers.

General Motors

2015 GMC Terrain SLE-2 FWD

  • MSRP: $30,745
  • Freight, dealer prep, fees and air conditioning tax: $1,785
  • Dealer discount (estimated): $1,421
  • Factory discount: $3,000 (manufacturer incentive)
  • Taxable subtotal: $28,109
  • Total price with 13 per cent HST: $31,763.17
  • The factory discount is not available with zero per cent financing for 48 or 60 months, or 0.99 per cent for 84 months.

Honda

2015 Honda Accord Coupe EX-L Navi CVT

  • MSRP: $31,630
  • Freight, dealer prep, air conditioning tax: $1,830
  • Dealer discount (estimated): $1,414
  • Factory discount: $2,000 (manufacturer incentive)
  • Taxable subtotal: $30,046
  • Total price with 13 per cent HST: $33,951.98
  • The factory discount is not available with 0.99 per cent financing for 48 or 60 months, or 1.99 per cent for 84.

Lexus

2015 Lexus IS 250 6AT AWD

  • MSRP: $40,500
  • Freight, dealer prep, fees and air conditioning tax: $2,180
  • Dealer discount (estimated): $2,417
  • Factory discount: $1,549 (manufacturer incentive)
  • Taxable subtotal: $38,714
  • Total price with 13 per cent HST: $43,746.82
  • The factory incentive is available with 2.9 per cent financing for 48 months or 60 months at 3.9 per cent.

Pricing information source:

and

. Calculations based on Ontario customers. Please note that while the information above is accurate at the time of publication, incentives are given at the discretion of individual dealers, and may be changed or discontinued at any time. Where noted, "dealer discounts" are negotiated with the customer on a case-by-case basis. Unhaggle Savings are actual discounts received by Unhaggle customers.

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