For many Canadians, a vehicle is a necessity rather than a luxury. Whether it’s getting to work, taking children to activities or simply accessing essential services, having reliable transportation in a country as vast and remote as this one is often non-negotiable.
However, the way Canadians finance vehicles has changed dramatically in recent years. Higher vehicle prices, rising interest rates and increasingly long loan terms mean that today’s car buyers face financial risks that didn’t exist a decade ago.
Before signing your next car loan agreement, here are some important things to understand.
The cost of vehicles has increased significantly
One of the biggest challenges facing consumers is the rising cost of vehicles.
New and used vehicle prices surged during and after the pandemic due to supply chain disruptions, inventory shortages and increased demand. While prices have stabilized somewhat, many vehicles, including used ones, still cost significantly more than they did just a few years ago.
As a result, Canadians are borrowing larger amounts than ever before. What may have once been a $25,000 loan can now easily become a $40,000, $50,000 or even $60,000 financing commitment.
When combined with higher interest rates, those larger loans can dramatically increase monthly payments and total borrowing costs.
Car loans are getting longer
In the past, five-year car loans were considered standard. Today, six, seven and even eight-year financing terms have become increasingly common.
Longer loan terms can make monthly payments appear more affordable, which is often appealing when vehicle prices are high. However, there is an important trade-off. The longer the loan term, the more interest you typically pay over the life of the loan.
For example, reducing a payment by stretching a loan from five years to eight years may seem like a smart decision in the dealership showroom. But over time, that lower payment can cost thousands of dollars more in interest.
Long-term financing can also leave borrowers carrying debt long after the excitement of a new vehicle has worn off.
Cars are depreciating assets
Unlike a home, a vehicle generally loses value over time.
In fact, a new vehicle begins depreciating the moment it leaves the dealership lot. Depending on the make and model, a vehicle can lose a significant portion of its value within the first few years of ownership.
This creates a situation known as being “upside down” or “underwater” on a loan. When this happens, you owe more on the vehicle than it is worth.
Long loan terms increase the likelihood of this occurring because the loan balance decreases slowly while the vehicle’s value continues to decline.
If you need to sell or trade in the vehicle before the loan is paid off, you may find yourself carrying debt from your previous vehicle into your next purchase.
Higher interest rates mean higher costs
Interest rates have risen substantially over the past few years, and vehicle financing has not been immune.
Even a small increase in interest rates can have a significant impact on the total amount paid over the life of a loan.
For example, a consumer financing a $40,000 vehicle at a higher rate may pay thousands more in interest than someone who financed the same vehicle just a few years earlier.
Many buyers focus primarily on the monthly payment, but it’s equally important to review:
- The interest rate
- The total cost of borrowing
- The total amount you will pay over the life of the loan
- Any additional fees or optional products being financed
Understanding the full cost of the loan can help you make a more informed decision.
Focus on affordability, not just approval
Just because a lender approves a certain loan amount does not necessarily mean it fits comfortably within your budget.
Before purchasing a vehicle, take time to evaluate the full cost of ownership, including:
- Loan payments
- Insurance
- Fuel
- Maintenance and repairs
- Registration and licensing fees
- Parking costs
A vehicle should support your financial goals, not prevent you from achieving them.
If a car payment leaves little room for savings, emergencies or other essential expenses, it may be worth reconsidering your options.
Consider buying less vehicle
One of the most effective ways to reduce financial stress is to purchase less vehicle than you qualify for.
While it may be tempting to upgrade to a newer model or additional features, choosing a more affordable vehicle can provide significant long-term benefits, including:
- Lower monthly payments
- Reduced interest costs
- Faster loan repayment
- Greater financial flexibility
- Less risk of negative equity
In many cases, the vehicle that best supports your financial health is not the most expensive one you can afford today.
The bottom line
A vehicle can be an important tool for work, family and daily life. However, today’s car loans are larger, longer and often more expensive than ever before.
Before signing a financing agreement, take time to understand the total cost of borrowing, how depreciation affects vehicle value and how the loan fits within your overall financial picture.
Making an informed decision today can help you avoid financial stress tomorrow.
If you’re struggling with debt, balancing large vehicle payments or wondering whether your budget can realistically support a new car loan, speaking with a non-profit credit counsellor can help you evaluate your options and create a plan that works for your financial situation. Book a free consultation today.
