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Canadians love lengthy loans

JD Power stats says families turning to longer payment periods to battle inflation

Published: July 25, 2012, 10:00 AM
Updated: June 19, 2018, 9:02 AM

Close examination of Statistics Canada data has revealed a potentially troubling pattern to the number-crunchers at J.D. Power and Associates.

According to the firm's latest Analyst Note, while monthly payments on new-vehicle loans have been flat since 2007 (at an average $528), the average after-tax income for most families has dropped or failed to keep up with inflation. Vehicle buyers are resorting to longer payment terms to lower their monthly costs.

J.D. Power says the combination is creating several long-term trends. The share of their after-tax income spent on car payments in 2007 was 7.8%, but by 2010 it had risen to more than 8%. As "wallet share" increases, consumers and lenders are leveraging whatever tools they can to keep their monthly payments consistent, which changes the underlying debt environment.

The average new-vehicle finance term five years ago was 50 months; it has extended almost every year since, with the average term now at 62 months. In 2007, 6.4% of buyers purchased a new vehicle with a payment term of 72 months or more; today that figure is at more than 40%. As a result, the number of car loans with negative equity has grown from 17% five years ago to 26% today.

And, at the end of the day, longer terms cost consumers. The average total cost of a vehicle five years ago, spread out over four years, was 107% of the purchase price. With today's extended terms, the average cost is now 114%.

J.D. Power says it's led to a paradigm shift in which the MSRP is no longer relevant to buyers. On the upside, the changes have at least sustained vehicle sales in Canada.