A recent report from Equifax Canada on Canadian Consumer debt activity has some good news and has some bad news. The good news is that the rate at which Canadians are racking up that debt is slowing. Additionally, delinquencies and bankruptcies are dropping sharply. The bad news is that the total overall debt load of Canadian consumers continues to climb.
According to Equifax’s report, the main culprit behind this recent spike in debt accumulation is an increase in car loans.
Some key points from the report include:
- Average consumer debt increased by 2 percent since last quarter to $21,164. This is down from a 2.7 percent increase the quarter prior
- Installment loans drove the increase, led by a jump of 3.9 percent in auto loans, year-over-year
- Overall Canadians are managing their debt payments better, with a decrease in consumer bankruptcies (9.4 percent) and in the 90 day + delinquency rate (1.6 percent).
“Car loans offer an extremely attractive buy-now, pay later option. But you really have to think in the ‘now’ to avoid debt challenges later,” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Services of Canada. “Owning a car is considered a necessity for many families, but you need to consider all of the costs, including gas, insurance, maintenance and parking, all of which will be added expenses on top of that car payment.”
With ultra-low interest rates and super long loan terms, cars seem like a reasonable buy for many. But before you buy that car and saddle yourself with monthly payments, there are a few things to consider.
It’s a depreciating asset
You’ve heard all the talk about good debt and bad debt. Cars are a bit tricky. Yes, in a sense they are good debt, because they provide an asset to secure the loan with, likely giving you a lower interest rate. But on the other hand, that asset depreciates (literally the moment you drive off of the parking lot), meaning that gap between what you own and what you owe could be significant.
Really, really understand the terms of the loan
Don’t fall for the smoke and mirrors that surround car purchases. Part of the reason that you may be able to afford the car payments is that car dealers extend the loan over 72 or 84 months (or in some cases even longer).
Think about it- that 84 month loan term works out to 7 years! What will the car you’re buying be worth in 7 years? Does it add up?
Reduce your car debt
The best way to avoid car trouble (debt trouble that is) is to reduce the amount of debt you take out in the first place.
Although new car smell is hypnotizing, it’s not worth the premium you pay for a new car. Selecting a car that is a couple of years old with low mileage will save you hundreds or even thousands of dollars. You still get many of the benefits and features that come with the new cars, but you drive away with a lower debt commitment.
Put off your car purchase until you’ve accumulated a bigger down payment. Putting more down means less to borrow- and less to pay back!
Are you thinking about buying a car, but are concerned about some of the debt implications in taking out a car loan? Call one of our trained credit counsellors 1-888-826-5898 or check out our free online debt analysis tool to get started