Six years might sound like a long time, but it's only the tip of the iceberg when it comes to the automotive loan pay periods and being "upside down" on a car.

One of the oldest pieces of wisdom when it comes to evaluating a prospective purchase still applies today: if something seems too good to be true, it probably is. Nowhere is this more relevant than when looking at automobile financing, one of the few remaining aspects of buying a new or used car that can still feel a little more like a dark art than a straightforward financial calculation of a loan.

The most common danger when signing off on a vehicle financing agreement is focusing on the size of your monthly payment, rather than the actual purchase price itself. It makes sense why this happens - most of us think of our own personal budgets on a weekly or monthly scale - but latching on to a payment you can make 12 times a year rather than multiplying that number by the years in the contract can obscure the actual cost of the car or truck.

The biggest issue? Your financing rate. Even if it's low (between 1% and 4%), if you stretch that loan over a long enough time frame you end up paying a fair amount more than the actual purchase. For example, the average Canadian takes almost six years to pay off a new vehicle loan, which means at 3.11% you end up handing over an additional $2,400, or almost 10-percent of the initial purchase price on say a basic $25,000 car.

 The most common danger when signing off on a car loan is focusing on the size of your monthly payment, rather than the actual purchase price itself.

Six years might sound like a long time, but it's only the tip of the iceberg when it comes to the automotive loan pay periods that are available to Canadian shoppers. Some manufacturers will extend customers to a whopping 84 months, with 96 months also available mostly through banks and third-party lenders.

It's a no-brainer that when you come close to doubling your payment term, you'll end up paying considerably more in interest no matter what the rate is. Even if you snag a zero percent rate, however, once you finance past a five-year window you may also encounter a new, and unique hazard: being 'upside-down' on your car. This means crossing the threshold where the amount of money you still owe on the vehicle is more than what it's actually worth on the marketplace - as in, if you sold the car, or traded it in, you'd still be in debt and have to cut a cheque for the difference.

Even if you snag a zero percent rate, however, once you finance past a five-year window you may also encounter a new, and unique hazard: being 'upside-down' on your car.

'Negative equity' is never a good thing, especially when it's associated with a consumer product like an automobile that is likely to continue to depreciate during the course of ownership. This only compounds the 'upside-down' nature of a long-term loan, because while your payments are fixed, the actual value of the vehicle continues to slide on a downward slope once past the tipping point mentioned above.

There's a very simple solution to both of these problems, and that is making the pledge to not buy more car than you can afford to fit inside a reasonable, 36-to-60 month loan period. Anyone who's ever dealt with high-pressure sales tactics can attest to the fact that it's easy to add package after package to a new car with the reasoning that it's only $40 or $60 or $80 more per month, but by re-focusing on the total sticker price and then sticking to a realistic loan term that won't see you underwater or forking over hefty interest payments, you can come out ahead by the end of your ownership.

 

Photo: Benjamin Hunting

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