The rise of the 8-year car loan

The average length of a car loan term is now 71 months, up from 63 in 2010. Joe Raedle/Getty Images

With 1.744 million cars, trucks and SUVs rolling off dealership lots in 2013, new vehicle sales rocketed to an all-time high in Canada last year.

But to get a sense of Canadians’ reliance on borrowing to fund our wants and needs in recent years, you can look no further than to how much we’re paying on average for our new rides – and for how long — these days.

The average payment on a car loan in Canada now stands at $549 a month, according to the latest data out from J.D. Power & Associates, a post-recession high (and likely all-time one, too).

The average financing term? Seventy-one months.

For those counting, that means shelling out well over five hundred bucks every single month for nearly six years to keep that vehicle in the driveway. And that figure doesn’t include of course any other major costs, like gasoline and insurance.

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And term lengths continue to trend up, according to experts, in tandem with our demand for newer and nicer cars.

“The hottest segment right now is 84 [months], and there’s actually a little bit of 96 out there as well,” Dennis DesRosiers, an automotive consultant, says of term lengths being offered this year.
The rise of the 8-year car loan - image

DesRosiers said JD Power’s numbers should be taken with a small grain of salt because they may not be wholly reflective of the market place.

“They have a relatively small sample,” the consultant said. “Are they getting the right percentage of Hyundai owners paying $350 a month? I don’t know.”

Still, by historical standards, the present term lengths jump out to him. “The figure is high,” DesRosiers said.

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The short explanation for why loan terms have become so lengthy in recent years is that leasing all but died off during the downturn in 2009.

Then, the market for investors who bought up bundles of leases was reduced to dust during the financial crisis.

Leasing hasn’t recovered much and that’s left financing the only option for would-be buyers who don’t have the money to buy a new car.

The problem for dealers is that leases kept monthly payments relatively low, leaving a lump sum payment at the end of three- or four-year term (and gave the option to trade in or pay off, and many opted for the former).

In contrast, financing spreads the total cost of the car (plus interest) across the life of the loan, which under a time frame of three or four years, would set monthly payments at a pretty steep price compared to the lease model.

“In order to make it easier on the consumer, they stretched the amortization period out,” DesRosiers said.

In doing so, however, the lifespan of some car loans these days (96 months, or eight years), is approaching the average lifespan of a vehicle in Canada, which is 9.8 years.

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That leaves a borrower with about 21 months to enjoy a paid off ride before they may be back for a new loan.

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