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Consumer warning over extended term loans for vehicles

Dec 18, 2018 | 4:00 PM

The Financial and Consumer Affairs Authority of Saskatchewan (FCAA) is warning the public about the dangers of buying a vehicle on extended term loans.

The government agency said financing over seven or eight years with low payments can leave the consumer at risk of negative equity when they try to trade-in that vehicle because they could be owing more than what it’s worth.

In a media release FCAA’s Consumer Protection Division Deputy Director Denny Huyghebaert said compared to a four or five-year financing period seven or eight years was a significant time difference.

“A vehicle will depreciate rapidly the moment it is driven off the lot. Consumers who purchase based on low payments due to extended term loans are at a greater risk of being in a negative equity position when it comes time to trade-in and purchase another car,” he said.

That debt would then be rolled into the financing of their next vehicle. He said it was common for people to want to trade in after driving the vehicle for three years.

Huyghebaert said advertisements offering low rates, longer terms and low monthly payments make vehicles seem attractive and affordable but it was important to know and understand the total cost of the transaction.

Tips from the agency to avoid financial risk included considering a shorter-term loan, paying off existing loans, and not to focus just on the monthly payment but on the total cost and length of the loan.

Advice from local dealerships

Don Jones with Anderson Motors Ltd in Prince Albert strongly agreed with the tips, but added they were an over simplification.

“Each consumer is in a different situation and must consider all options at their disposal. How long do you plan to keep the vehicle? Consider a down payment,” he said in an email to paNOW.

Jones also noted in part, that “the maintenance and care of the vehicle can add thousands of dollars to your trade value. Consider a service contract that includes all these costs at time of purchase,“ he said.

Ken Madraga at Melody Motors in Melfort mirrored that advice and said oftentimes people focus on the monthly payment and not the terms.

“The terms can come back to bite you because some people who are going for eight years, sometimes the vehicle might be miled out by that time,” he told paNOW. “They could be putting 240,000 kilometres on it and that’s an awful long time to drive without warranty or assistance.”

He said it was important to get the additional coverage for the whole loan period beyond the typical three-year warranty.

“Most people are trading in at a three to four year period and if you have an eight-year loan and then trade in, there is going to be a lot of the vehicle that you haven’t paid for yet.”

Madraga said especially with taking a loan over an extended period it was important to factor in the added costs that would go with that.

“Your budget is not just the payment: it’s insurance, fuel and maintenance costs and other aspects like tires and transmission flushes,” he said.

The bottom line is consumers are struggling with handling the costs with long term loans. According to Huyghebaert with the FCAA it’s more common these days.

“ As consumers we tend to focus on those low monthly payments and if it’s not managed carefully consumers can get into trouble,” he said.

 

glenn.hicks@jpbg.ca

On Twitter:@princealbertnow