Destroyed in an accident at a Sackville intersection in late September, Dartmouth realtor Kamryn Lake’s Jeep was a write-off.
And so, still aching from the impact of that collision which took “Jeepie” from her, Lake was forced to look for a new ride in October.
She took to social media, reaching out to other die-hard Jeep fans through the Nova Scotia Jeep Club on Facebook with a very specific idea of what she wanted: a black, four-door Jeep Wrangler with an automatic transmission and no more than 125,000 km on the odometer.
Her budget? $20,000.
That’s what she figured the insurance company would likely be paying out for her old Jeep.
“I’ve had a million people contact me with 2016 Jeeps priced around $40,000 or $50,000 but I’m not interested in payments that big,” said Lake. “Why pay three times the price when I can get something that looks brand new for a lot less?”
In Canada, there were 1.9 million new vehicles bought in 2015 alone, the third consecutive record year for the automobile industry that employs more than 120,000 people in manufacturing and supports another roughly 280,000 jobs across the country.
Those booming sales for the automakers, though, have also left many Canadians saddled with a growing amount of debt. In the eight years that ended in 2015, the Financial Consumer Agency of Canada (FCAC) reports that the auto finance market roughly doubled in size, going from about $60 billion to $120 billion.
“The expansion of consumer debt in auto loans has outpaced that of all other forms of household credit, including mortgages,” wrote the authors of the FCAC’s most recent Auto Finance: Market Trends report.
In that report, the federal agency red flags the arrival of a much-longer repayment periods as serious issue. That often lets consumers ink deals for more car than they can actually afford, a situation that ups the amount of interest they wind up paying and can also leave them still owing money on their vehicles when they go to trade them in.
“They’re shopping the payment instead of the cost (of the new vehicle),” said Ken Whitehurst, executive director of the Consumers Council of Canada, in an interview.
Here’s a common scenario. A family has the choice of buying an economical car or mid-sized sedan.
The cheaper car is priced $16,000. At a three per cent rate of interest over the next three years, those payments would be $465 per month.
The sedan is twice as expensive at $32,000. But by stretching out the length of the term of that loan to six years at the same rate of interest, the monthly payments for it are astonishingly comparable to those of the smaller car. Only $486 per month.
Faced with that situation, many Canadians choose to buy the more expensive vehicles and spread the payments out for a longer period of time.
There is trade-off for those low monthly payments for more expensive vehicles. And those are higher interest costs and the possibility of getting stuck still owing money on a car when it comes time to trade it in.
“Canadians continue to trade in new cars after four or five years, putting them in a position where they owe more money on their loan than the car is worth, which leads them to finance the old auto loan debt into their next car loan,” said FCAC spokeswoman Lynne Santerre.
Throw in a sudden and unexpected job loss or car accident and those motorists can wind up in a financial bind, stuck with negative equity on their vehicles.
“You may lose money if your car is worth less than the amount you owe on your loan … and have to borrow money to cover the difference between what you can sell your car for and what you still owe on it,” said Santerre. “Also, if you get into an accident and your car is a total loss and you have negative equity, the money you get from the insurance company may not cover what you still owe on your car loan.”
According to consumer intelligence firm J.D. Power, the number of motorists still owing money on their vehicles when they trade them in rose by 50 per cent – now at 30 per cent – over the five years that ended in 2015. The average amount of that debt? $6,700.
“Consumers who purchase more car than they can afford may not necessarily default or even fall behind on their payments, but they may be jeopardizing their ability to meet other credit obligations. This happened in the U.S.,” said Santerre.
“High levels of household debt also potentially reduce the resilience of households during an economic downturn,” she said. “Over-indebted households are more vulnerable to the impact of unforeseen events, such as job loss, illness, or accidents.”
When the prospective car buyer is someone who has a poor credit rating, either because they’re young and haven’t yet established themselves as a good risk, or through financial troubles, the cost of borrowing that money often goes way up. It’s estimated that up to 25 per cent of car financing in Canada consists of these non-prime loans.
“When high interest rates are combined with longer terms, consumers can find themselves with loans that cost twice as much as the vehicle they bought,” wrote the authors of Auto Finance: Market Trends.
Take the example of a $21,000 minivan bought with payments spread out over seven years. When that minivan is financed at three per cent interest, the cost of the payments is only $278 per month and the total amount of interest paid out is $2,300.
But when a non-prime loan of 25 per cent interest is used to buy that same minivan over the same period of time, the monthly payments shoot up to $532 and the total interest, $23,000, winds up being more than the cost of the vehicle.
At the Consumers Council of Canada, Whitehurst advises people to think of financing a vehicle and buying it as two separate purchases.
“They’re making two different purchases: the purchase of the money … and the purchase of a vehicle,” he said.
His advice is to start with a budget based on the total price of that new car, truck or minivan. Then, go to financial institutions and shop around for the best deal on borrowing that money. Look at the interest rate the financial institution is prepared to offer and also what the conditions or terms are of that loan and how it will affect your credit rating.
“Consult two or three before you go into a dealership and you can get an idea of what you can afford,” said Whitehurst.
The loan terms, which are too often overlooked in the rush to buy a vehicle, can be critically important. Although banks typically charge a slightly higher interest rate, for example, they also often offer lenders the opportunity to pay down the loan faster.
“Let’s say you’ve got a great job and you get a bonus and want to repay your loan early,” said Whitehurst. “Do you want to pay a penalty (for repaying your loan more quickly)?"
That flexibility can also help when there’s a job loss or some other reason why the borrower misses a few payments.
“True, (failing to make payments on a car loan) is certainly not a good practice to keep up, since missed payments will damage your credit score and both banks and dealerships can seize your car if you default for too long,” notes the credit marketing firm Loans Canada on its website. “However, your bank will probably be more lenient if you should miss a payment or two, especially if you’ve had a good record with them otherwise. They’ll likely charge you a penalty fee, but won’t immediately send a debt collector after you.”
Banks, though, can be leerier of lending money for car loans because of the rapid depreciation of the asset – and banks can also take a lot longer to approve a loan than the dealership’s financing arm.
The bottom line on getting the best deal when it comes time to buy a vehicle – at least in terms of financing costs – for those with a poor credit rating is to buy the least amount of car that’s absolutely necessary, said Whitehurst.
“They should spend the absolute minimum they can on a car or try to do without a car,” he said. "Try to live closer to work and walk.
“If you’ve wrecked your credit, you’ll find people either won’t lend to you because you’re too high a risk or it’ll be too high a rate of interest,” said Whitehurst. “It might be best to get the help from a family member.”
With the high rate of interest charged to those with a poor credit rating, there’s also a much greater likelihood that they will wind up defaulting on those higher car payments. And that can mean their cars may get repossessed.
The latest technology in today’s vehicles, including global positioning satellite tracking systems and ignition immobilizers, makes it a lot easier for repo men and women to do their jobs.
“Federally regulated banks do not employ this technology. However, some non-prime consumers are required to agree to the installation of these devices to obtain an auto loan,” states the Auto Finance: Market Trends report. “In addition to the cost of installation, these consumers also pay the monthly fees to cover third-party monitoring services.”
Consumer groups are already complaining that there’s no formal recourse for them in Canada if that tech is used in a way that puts them at risk. That could happen if the repo man or woman decides to immobilize the vehicle in a remote location.
“Concerns have been raised that some lenders are not effectively managing the use of this technology,” the report notes. “Some consumers have complained that lenders have repossessed their vehicle before the borrower can prove that payments were duly made."
Provincial consumer affairs officials in both Prince Edward Island and Nova Scotia said in October they had not yet received any complaints from consumers about this misuse of that technology.
“As with any emerging technology, the government will consider the impacts and review regulations and legislation accordingly,” said Nova Scotia provincial government spokesperson Marla MacInnis. “Currently, the province has not received any complaints related to this issue.”