OTTAWA – The Financial Consumer Agency of Canada is raising concerns about the growth in long-term car loans which may have lower monthly payments, but cost more in interest.
In a report Tuesday, the agency said loans to buy new trucks and cars with terms of more than six years have become a growing trend, posing risks for buyers.
“Consumers must carefully examine their needs and their financial situation to ensure they can repay their car loans without undue strain, and with a full appreciation of the total interest charges and value of the car throughout the loan period,” agency commissioner Lucie Tedesco said in a statement.
Making car payments over six or seven years instead of five years reduces the monthly payment because it spreads the repayment of the loan over a longer period. However, the loans end up being more expensive for borrowers because they pay interest for a longer period of time.
Long-term loans are especially expensive for borrowers with low credit scores, who may pay higher interest rates.
The agency said it was working to ensure consumers receive the information they need before agreeing to a car loan and developing new online material to help borrowers.
Its report follows a record year of auto sales in Canada. Drivers bought nearly 1.9 million new cars and trucks last year.
The agency said that due in part to the allure of lower monthly payments, the country’s long-term auto finance market has nearly doubled in the last eight years.
It also noted the average new car loan last year had a term longer than 72 months, up from approximately 65 months in 2010.
Despite the longer loans, many consumers are still changing their vehicles every four years or so, while still owing on their previous vehicle, the agency said, adding that the outstanding balance on the previous loan is typically rolled into the loan for the new vehicle.