This type of car loan may cost you more in the long term

Why a long-term car loan is a bad idea

By Special to MoneySense on March 17, 2016
Estimated reading time: 3 minutes

Despite low monthly payments, you may end up paying more over the long run.

This article is 4 years old. Some details may be outdated.

Buying a new car is an expensive proposition that for many Canadians means borrowing money with a car loan. But financial experts caution shoppers not to be lured into spending more than they can afford through long-term car loans that offer lower monthly payments, but ultimately cost more. Brigitte Goulard, deputy commissioner at the Financial Consumer Agency of Canada, says consumers need to consider more than the monthly payment. “One of the most common pitfalls we see are people just thinking about the type of car that they want,” she said. Goulard say by extending the term of a car loan to seven or eight years, it will drop the monthly payment, but borrowers will pay more in interest. READ MORE: Why longer car loans should worry you “You walk into a dealer and sometimes the first question they’ll ask you is how much can you afford monthly,” she said. “You need to think about monthly in terms of the car that you can afford. So if you think you can only afford a small compact, go for the small compact. Don’t go for the SUV just because you can afford the monthly payment over eight years.” Goulard says when considering how long it will take to pay off a car loan, people need to think about long they expect to keep the vehicle. If they think they are going to want a new car in four years, they should not be taking out a car loan with a term longer than that, she says. The vehicle people want when they are 25 might not be the car they need when they’re 30. An infant car seat may not easily fit into the back seat of that two-door sports car and that could cost you when you find yourself needing a more practical four-door sedan.

Who really benefits from your long-term car loan

While longer term car loans will cost more in interest, what may be even more trouble is needing to buy another car before you have paid off the one you’re driving. The FCAC recently said that the country’s long-term auto finance market has nearly doubled in the last eight years as the average new car loan last year had a term longer than 72 months or six years, up from approximately 65 months in 2010. However, despite the longer car loans, drivers are still changing their vehicles every four years, rolling the outstanding balance on the previous loan into the loan for the new vehicle. “You end up paying for a car that you don’t own anymore for several years,” Goulard said. Credit counsellor Pamela George says she wouldn’t borrow money to buy a new car, but if people are going to, they need to do their homework before walking into a dealership. “Not just look at the monthly figure and say, ‘I can afford this.’ Ask yourself, ‘How will this impact my savings?’” says George, who works at the Credit Counselling Society in Ottawa. George said if people feel they must take a loan, try to make a large down payment. “If you can go in with a down payment and assume part of the risk, then I’m sure you now have negotiating power,” she said. To help car shoppers, the FCAC provides information and tips on its website. Goulard says be sure to shop around for financing when buying a new car. “You can go directly to a bank. You can go directly to a credit union. There’s various lenders in the market.”