Nearly seven out of 10 Canadians who borrow to buy a new car, have signed up for a loan term of 72 months or greater. Good idea, or bad? Or something else?
Perhaps it is the third option. Loans stretched out over long repayment periods simply make common sense in many instances, 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 made affordable because there is an ocean of "free" money sloshing through the marketplace. Virtually all car makers in Canada offer loans at very low interest rates and in many cases it's possible to get a deal at zero per cent and stack, or combine, the no-cost money with a rich cash incentive. Kia, for instance, will give you a $1,000 factory incentive on the 2015 Optima that can be stacked with zero per cent financing for up to 60 months.
By contrast, Kia has a 0.9 per cent lease rate for 48 months, but without the factory money. Obviously it makes more sense to buy rather than lease an Optima. It's a similar story for many other models in Canada.
And even if the zero per cent rate and factory money is available for the lease customer, 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?"
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.
Leasing, says DesRosiers, "returned to the 20 per cent level, but is unlikely to go back to the 40-plus range experienced up until the summer of 2008...Longer loan terms and their lower monthly payments offset much of the monthly payment advantage of leasing."
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 68 per cent so far in 2015.
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, 29.4 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. As unhaggle.com points out, in the case of a 2015 Ford Expedition sport-ute, the negotiated dealer incentive comes to $5,551, while the factory deal is only $1,000.
Yes, there are deals to be had, though if it's a financed deal, imagine making that monthly payment until 2020 or beyond. Here's a look at our four deals for the week.
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.
2015 Ford Expedition 4WD Ltd
- MSRP: $64,399
- Freight, dealer prep, air conditioning tax: $1,786
- Dealer discount (estimated): $5,551
- Factory discount: $1,000 (Manufacturer incentive)
- Taxable subtotal: $59,634
- Total price with 13 per cent HST: $67,386.42
- All incentives are available with 1.99 per cent financing for 48 or 60 months, or a 2.99 per cent lease rate for 48 months.
2015 Kia Optima Sedan Automatic EX Luxury
- MSRP: $31,495
- Freight, dealer prep, fees and air conditioning tax: $1,830
- Dealer discount (estimated): $1,475
- Factory discount: $3,000 (manufacturer incentive)
- Taxable subtotal: $28,054
- Total price with 13 per cent HST: $31,701.02
- A $1,000 factory incentive is available with zero per cent financing for 48 or 60 months, 1.99 per cent for 84 months. The factory money is not available with a 0.9 per cent lease rate for 48 months, 1.9 per cent for 60 months.
2015 Mazda CX-9 4WD GT
- MSRP: $45,995
- Freight, dealer prep, AC tax: $2,030
- Dealer discount (estimated): $2,640
- Factory discount: $4,000 (factory incentive)
- Factory discount: $1,000 (loyalty incentive)
- Taxable subtotal: $40,385
- Total price with 13 per cent HST: $45,635.05
- The factory incentives are not available with zero per cent financing for 48 or 60 months, 1.995 for 84 months. The same for a lease rate of 0.99 per cent for 48 months.
2015 BMW 535i xDrive Sedan
- MSRP: $66,650
- Freight, PDI, AC tax: $2,230
- Dealer discount (estimated): $2,800
- Factory discount: $1,500 (manufacturer incentive)
- Taxable subtotal: $64,580
- Total price with 13 per cent HST: $72,975.40
- Factory incentives are available with 2.9 per cent financing for 48 or 60 months, 4.99 per cent for 84 months. The same for a lease rate of 3.9 per cent for 36 or 39 months.
. 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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