Financial and Consumer Affairs Authority (FCAA) of Saskatchewan is focusing on negative equity as the theme of the month.
Negative equity, also referred to as being underwater on a loan, is when people owe more for a vehicle than it’s worth.
Consumers will trade-in vehicles they still owe money on and roll the debt forward into the financing of a new vehicle.
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According to a recent report by the Financial Consumer Agency of Canada, the average auto loan now exceeds six years, while new vehicles are typically purchased every three to four years.
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FCAA said the cycle of refinancing debt onto a new vehicle is one that can get consumers into financial trouble.
Underwater loans loan could result in defaulting on other financial obligations such as mortgages and credit cards.
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What if a vehicle gets totalled?
FCAA said the insurance company will generally pay what the vehicle was worth, not what the consumer owed, meaning the consumer may be on the hook for the debt and have nothing to show for it.
Four ways to avoid negative equity:
- Pay off existing vehicle loans. Avoid rolling negative equity forward into new purchases;
- Don’t focus on a low monthly payment. Look at the total cost of the loan;
- Buy within your budget and stick to it; and
- Consider a shorter term loan. Longer term loans are typically more expensive.
For more information, call FCAA at 1-877-880-5550 or email consumerprotection@gov.sk.ca.
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