Canadians getting lured onto ‘auto-debt treadmill’ by signing on to long-term car loans: “The federal consumer agency of Canada is sounding warning bells about the growing debt Canadians are taking on through auto loans.”
This is the described auto debt tread-mill
“In these circumstances, consumers put themselves in the position of having to roll the debt owing on the long-term loan into the loan for the purchase of the new vehicle, thereby potentially stepping onto an ‘auto-debt treadmill’,” the agency warned.
“Spurred by tantalizingly low interest rates, sweeteners like stretched out loan timelines, and increasingly confident consumers who worship their wheels, car debt has been growing at a phenomenal pace.”
The FCAC called the growth in long-term car loans “worrisome,” noting that the average new car loan last year had a term longer than 72 months, up from about 65 months in 2010.
“Consumers have been taking advantage of stretched amortization periods in recent years to take on more debt without increasing their monthly payments, the Financial Consumer Agency of Canada revealed Tuesday in a research report tracking market trends.”
the auto industry is coming up with ways to sell more expensive cars
you’ve got leases, where you make payments on a car will all kinds of restriction
eight year car loans this is more like a long-term lease
by the time the car is paid off its time for another car maybe even sooner
just because its expenses doesn’t mean it’s going to last longer
these people are buying luxury not quality or durability
“In the same five years, the share of consumers trading vehicles with negative equity has risen by 50 per cent” – this is where people trade in there 3 year old car for a new one and role the remaining loan into the new loan
“Although significantly more consumers are carrying negative equity when they break their existing auto loans, the average amount of negative equity carried by consumers who are underwater … has hovered around $6,700,” the report says.
“Vehicles depreciate quickly, which means the negative equity peaks in the early years of a loan when the portion of each payment dedicated to interest tends to be larger. Holding the loan longer eventually moves the borrower into a “positive equity” position. That typically happens by the fourth year in a standard 60-month auto loan, but the longer loans leave many borrowers in negative equity positions into the fifth year and even well beyond it, the report says.”
Simple Money Solution: I am a big fan of the used car market it represents a big saving opportunity, if you own two car make sure at least one of them is used car.
Today on the show I am trying to make a case for why you need a budget
Welcome to simple money solutions podcast where we focus on money from a Canadian perspective. This podcast is released weekly and show notes for every episode can be found at livelifesimple.ca, now let’s get on with the show.
What is a Budget:
A tool to manage your financial inflows and outflows guiding you toward your financial goals.
For me the budgeting is a 3 step process:
1. Record your income and expenses by category (you have far more control over your expenses than you do your income so more expense categories)
2. Using historical data you have collected in step 1 develop a plan (monthly) for your future income and expenses by category
3. Monitor your progress
Making a Case for Budgets:
The word budgets has been a negative term
Viewed as a tool to restrict your spending – like a diet restricts your eating
Resourceful tool (proactive rather than reactive) as your life changes and evolves
Provide you with information and direction to help you achieve your goals
Change your current financial situation – you need to know where you are currently
If you fall on tough times
If an opportunity presents itself
A good solution for keeping a record of your income and expenses is to use a smart phone app such as Mint, Every Dollar, YNAB, spreadsheet, or even pen and paper.
Record keeping is a discipline
You need to be diligent and record every transaction.
Documenting your income & expenses, you will learn something you didn’t know
Understanding your money inflows outflows will help you make better decisions
Having a budget will reduce stress
Having a budget will improve your relationship
Having a budget is a financial road map of where you have been and where you are going