What Is The Average Length Of A Car Loan In Canada?

Posted by on August 13, 2019 @02:59:42 EDT
An analog weighing scale.

Car loans in Ontario are a multi-faceted enterprise, each of which has been designed specifically to suit a particular person’s financial situation and the needs imposed by the specifics of that situation. Keeping that in mind, it’s difficult to talk about the average length of a car loan, given that any mathematical average we may find ourselves tempted to calculate (such as mean, median, or mode) is simply not going to be representative of the average situation, because there’s a lot more that goes into whether a loan’s viable or not than the purely numerical value of said loan.

With all that being said, there’s more and more data being gathered, analyzed, and released to the public every single year about the state of car loans, not just in Ontario, but in Canada and general, and from this mountain of information it is possible to extrapolate some straightforward, cursory conclusions which we can use to discuss what a workable average of car loans in Ontario could be said to be.

According to the trend (which unlike specific data points, we can take meaningfully about, given that it’s one of the most reliable parts of statistics in general), automobile owners in Canada are penning longer and longer car loans in Ontario. Every year, there are more people who have signed at least 84-month terms on their car loan in Ontario. These incur lower payments, and as such are driving pure volume numbers of sales when looked at objectively from a bird’s-eye-view.

Why Are Loans Getting Longer?

Way back when, the standard term of a car loan in Ontario, Canada, was five years. Nowadays, however, buyers have been trying more and more to use a combination of low interest rates and long-term loan offers in order to make their monthly payments as low as they can possibly get them to be. This makes sense, after all. Why on earth would you pay more per month when you could just pay less instead?

Another question you may well ask if why lenders are allowing them to get away with such low monthly payments (consider the inverse of the question asked above: Why charge less when you can charge more?). This, however, is not so tricky as it may first appear, and the financial distance between the two sides of the deal is not altogether so difficult to resolve.

The longer the terms of the car loan in Ontario, the more money lenders can expect to make off interest throughout the course of the deal. It’s a win-win, you might say. Everybody’s happy: the buyers are paying lower monthly fees (albeit over a longer period of time) and lenders are making more money of interest (when considering the car loan in Ontario as a financial deal on the whole.

Pricier Cars

A black sports car.

Part of the reason for this increase in the average terms of a car loan in Ontario is the car-buying populace’s predilection for wanting to own more and more expensive vehicles. This follows a general trend globally, as countries are trending towards being more and more developed, and larger and larger swathes of the population have access to enough disposable income to make this kind of financial decision viable. The more expensive a vehicle is, the more it’s going to cost per month.

This can, of course, be offset by increasing the terms of the car loan in Ontario, so that instead of owning a Volkswagen Golf for x amount per month, they can instead own a BMW M3 for x amount per month, with the caveat that they’ll go on paying the monthly fees for longer with the BMW than with the Volkswagen. It’s worth noting at this point that these figures are purely fanciful and are being used to make a point: the author has no idea whether it’s ever possible to reconcile the price differences between a Golf and an M3 into the same monthly payment. He certainly hopes it’s the case, however.

Potential Downsides

None of which is to say that going for these longer term car loans in Ontario is a completely safe bet, however. As with any financial decision that is likely to provide benefits in one arena, there are correspondent downsides in another aspect of the buyer’s life. For one thing, the buyer clearly loses a lot more money over the course of the car loan in Ontario because of how much longer he spends paying interest.

Interest rates, as you may already be aware, don’t go towards the value of the vehicle and can be reasonably said to only function as a way to offset the risk taken on by the lender when he signs the buyer up to the car loan in Ontario in the first place. The more interest you pay (or the longer you pay interest for), the more money you’re paying that isn’t going towards the vehicle itself. In the long term (as is the case with these long-term car loans in Ontario), you are consequently going to end up spending a lot more money on interest than if you’d signed up for a more traditional, shorter-term car loan in Ontario.

In some extreme cases (which vary depending on the lender, the year, make, and model of the car in question, and the credit score and payment history of the buyer) the interest paid can wind up being almost as much as the value of the car itself. Another point worth mentioning with regards to this type of car loan in Ontario is that the majority of lenders are going to require much more automobile insurance than was needed during the length of the agreement, on account of the added risk. This is also going to prove difficult for the buyers’ bank accounts to handle.

Underwater Deals

A photograph taken underwater.

As you can see, with longer-term car loans in Ontario, there’s a tendency for associated costs and prices to rack up before your very eyes. To make matters worse, we have still another problematic situation to warn you about.

We’re not in the business of fear-mongering, but in this day and age of increasingly long average lengths of car loans in Ontario, it would be doing you a disservice not to lay out all the facts as we have access to them. This latest issue arises when the owner of the car goes to trade it in at the end of the longer-term car loan in Ontario, and it’s known as an underwater deal, or an underwater trade-in.

An underwater trade-in is essentially when, upon attempting to trade in the car, owners realize that the car itself has drastically decreased in value since they got it. Granted, every car is a depreciating asset that loses value the second its wheels start spinning. But not every car loses enough value to qualify as a fully-fledged underwater trade-in.

Debt-To-Asset Ratios

One of the obvious concerns with this latter type of scenario is that the owner has simply lost a great deal of money on their car loan in Ontario. While this is true, and undoubtedly distressing, it’s not even close to the biggest problem with an underwater trade-in.

The main issue is that making a deal like this is going to negatively impact the car owner’s debt-to-asset ratio. A debt-to-asset ratio is exactly what it says on the tin: they divide your total debt by your total assets, and multiply the figure by 100 to come up with a percentage.

Doesn’t sound too bad, right? After all, is a suboptimal debt-to-asset ratio really going to kill you?

Well, no, it’s not. But it’s certainly going to make your financial life a lot more unpleasant than it would be otherwise. To understand exactly why this is the case—and why the increasing average lengths of car loans in Ontario could be seen as a bad thing—we need to briefly discuss credit scores and how they’re calculated.

Your credit score is basically a way for lenders to tell, with mathematical precision, exactly how likely you are to pay back the money you’ve borrowed in full and on time. Indeed, your credit score is the single biggest factor that’s going to impact the eventual deal you’re offered, not just with car loans in Ontario, but with other purchases like houses too. The better your credit score, the more reliable you are, and vice versa.

Everybody knows roughly how credit scores work. But fewer people understand exactly what goes in to the creation of your credit score. For the sake of this example, we’ll be discussing the FICO score, which is the most-used credit scoring model in Canada, and is likely to be put into operation by almost every lender you come across in some form or another.

FICO And Their Variable Weighting

An analog weighing scale.

Your FICO score depends most of all on your personal credit history, which is logical. If a credit score is supposed to be predictive of a future state of affairs (in this case, your ability to pay back the money you’ve been lent), it figures that it would rely mostly on your history. As we all know, examine the history of any subject is the only real way to understand how that subject is likely to change in the future.

After your credit history, however, one of the most heavily-weighted variables in the FICO equation is your debt-to-asset ratio. The higher the ratio is, the more debt you have in comparison to your assets, and from FICO’s point of view, this is a very bad thing indeed. The worse it is, the more negatively it’s going to affect your overall score.

Are you seeing where we’re headed with this? If the car loan in Ontario is too long-term, you risk an underwater trade-in situation. And if you end up with an underwater trade-in, you’re going to increase your debt-to-asset ratio, which in turn is going to tank your credit score, making it even more difficult for you to secure funding for future car loans in Ontario, as well as even more seismic financial decisions such as buying property.

Summary

In conclusion, the average length of car loans in Canada has been growing steadily over the last few years, and even though this results in lower monthly payments for the buyer, there are serious downsides to getting stuck into a super long-term car loan in Ontario.

We don’t recommend ideal lengths of loans off the top of our heads: that’s a pointless exercise, since everybody’s situation is different. What we do want to do, however, is make people aware that there’s more going on than the figure you get every month in the mail.

Given that we’re talking about car loans in Ontario and credit scores, have you been having a hard time securing approval for a loan because of your score? If you have, why not give the team here at autoloan.ca a call? We consider every single application we receive, irrespective of score.