With the 0% financing options available to new car purchasers, many consumers are taking advantage of longer and longer. Purchasers are taking advantage of really low car payments by stretching the payments terms as long as 96 months. That is 8 years people!
The average loan term is 21 months and the average payment is $549 according to the latest data out from J.D. Power & Associates.
Not only is there a possibility that your car will be falling apart by then, you will likely end up owing more than the car is worth when your payments are finishing – right around 6 years. It’s called Negative Equity and it’s a problem.
Money Sense Magazine shared this startling infographic to make the problem crystal clear. Imagine if you tried to sell the car or had to deal with it being written off from an accident. You would owe the lender more money than you could possible get for the vehicle.
On top of the Negative Equity issue, at 5, 6, 7 and 8 years, you will very likely be covering car payments and increasingly hefty repair bills as your car ages. An 8 year loan is approaching the average lifespan of a vehicle in Canada of 9.8 years.
If you are planning to write your car off as a business expense you can claim business portion of all of the expenses, including the interest on the loan. You also claim the depreciation of the vehicle over time. Do your research on this one. There are a lot of tricks to getting it right and some ways to benefit. For Example: Buying your vehicle at the end of your fiscal year allows you to take best advantage of the Half Year Rule where you can only claim 50% of the depreciation in the purchase year.
Watch out for these long payment terms. Do the math and make sure that you balance risk and reward.
What do you think of the long loan options? Is the risk of Negative Equity worth the benefits of the low payment? Share your experience below.