Ford Motor Co. has joined financial regulators in raising concerns over Canadians’ appetites for longer-term loans to finance the purchase of new vehicles. Regulators have warned in recent years about debt-burdened consumers taking advantage of loan offers that leave them in a negative-equity situation where they owe more on the car than it’s actually worth.Mark Buzzell, chief executive officer of Ford Canada, told media in an interview at the Vancouver auto show this week, that Canadian automakers are selling 41% of their vehicles with loans of six or more years. It’s not uncommon to see loans stretch out to eight or nine years, with interest rates still sitting at near-record lows.Ford says it is moving to reduce the number of sales it makes at longer terms, but it’s hard when the rest of the industry is doing so. “We really are trying to limit the trade cycles to shorter terms, but at the end of the day we have to stay competitive,” Buzzell told Bloomberg News…
…Automakers—not just Ford—are concerned, says George Iny, car analyst and director of the Automobile Protection Association. “They’ve told regulators two or three times now that they are concerned that car buyers are overburdened and carrying a lot of debt forward from a previous financed vehicle when they go into a dealership to finance a new one.”
Last year was a record year for auto sales with 1.95 million in vehicles sold and Iny points out that there’s two key reasons for that. “It’s been fuelled by low interest rates coupled with longer financing terms of 84 and even 96 months that many car dealerships are offering, just to make the sale…”
In many ways, we are starting to witness the same kinds of problems in the car market that are seen with real estate. Low interest rates and tiny monthly payments are causing home buyers to over extend themselves to the brink. This same problem is now surfacing in the car-buying market…
“It’s good to limit your financing to 72 months and if it’s not possible for you, at least be aware that you shouldn’t be financing unpaid payments from your previous car,” says Iny. “Don’t roll the old debt onto the new loan, which people get talked into doing quite often.”
So, don’t stretch your bi-monthly or monthly payments to get something newer or bigger. Instead, stick to what you were originally going to buy and if the monthly payment is lower than you can afford, “take that difference and do the smart thing,” says Iny. “Save it in a Registered Retirement Savings Plan. You’ll increase retirement savings and get a refund as well.”