The evidence suggests good, or at least not bad. Here’s why.
First,
the ride you buy today is likely to be useful and functioning for the
next 15 years or more, according to research from Crosiers Automotive
Consultants. Dossiers’ data suggest you’ll get 308,000 km out of a
new ride bought today. At 20,000 km/year, that’s 15 years. Thus, even if
you make payments for the first six to eight years of ownership, you
can choose to be payment-free for the last seven to nine.
Second,
after making car payments for, say, seven years, the vehicle in your
driveway will still be worth quite a lot. Crosiers president Dennis Crosiers says the research shows it’s a myth that vehicles lost half
their value when drive off the dealer lot. The reality is a vehicle
depreciates 10-20 per cent when it becomes yours, then 10-15 per cent
each year thereafter.
“Overall, it is
not uncommon for vehicles to hold close to 50 per cent of their value
into years five to seven of their ownership cycle,” says Crosiers.
Thus, even if you opt for a seven-year loan, you’ll still have something
of value to drive every day when you’ve reached the payment-free point.
How
valuable? The average passenger car transaction price, notes Crosiers, was $27,563 in 2014. If you’re average, even after making
payments for seven years and getting plenty of service out of your car,
your ride will be worth in the neighborhood of $13,000-$14,000. For
consumers worried that their car will be worthless after 72, 84 or even
96 monthly payments, there is comfort to be found in how well vehicles
hold their value.
The reality of the
new vehicle marketplace today is that consumers are acting quite
sensibly or at least realistically when stretching out payments for many
years.
“If a consumer owns their
vehicle for 84 or 96 months -- very common -- what’s wrong with the
lending term being that length?” asks Crosiers. “It may cost more
interest but most consumers have a monthly budget for their vehicle and
view their payment plan as a life-long endeavor…essentially a monthly
payment for life.”
Except, of course,
consumers today can secure vehicle loans with interest costs at historic
lows. Even loans of 84-month terms can be had at interest rates less
than two per cent. This is point three for the case that long loan terms
are not such a terrible thing, but rather in some instances a positive.
A
new Honda Accord coupe, for instance, can be had with 1.99 per cent
financing for 84 months or a GMC Terrain compact SUV (sport-utility
vehicle) is on offer with financing for 84 months at 0.99 per cent. A
Mazda CX-5 compact SUV? The offer there is 2.49 per cent for 84 months.
The money’s not free, but very cheap over such a long term.
Yes,
there are arguments to be made against very long loan terms – that it’s
folly for consumers to lock themselves into payments over six, seven,
eight or nine years. Some argue that long loan terms increase the risks
of loan defaults. Others say that when buyers lock themselves into one
vehicle for long terms, this can negatively affect the health of the
marketplace by taking those buyers out of the cycle. So far, says Crosiers, problems associated with these issues have not surfaced in
Canada.
For now and at least as long as
interest rates remain low, long loan terms will remain a staple in
Canada. There is a good case to be made that this is not such a bad
thing.
