TORONTO (Reuters) - Canadians may be purchasing cars they cannot afford, having been lured onto an “auto-debt treadmill” by offers of long-term loans with lower monthly repayments but higher overall interest, the federal consumer watchdog warned on Tuesday.
The warning adds to concerns that record-high consumer debt and hot home prices in parts of the country could pose a risk to Canada’s economy and financial system.
Similar warnings about risks in auto lending have been made over the past two years in the United States, fueled by concerns about lenders’ willingness to lengthen terms and chase borrowers with lower credit scores, while offering loans that exceed the value of the vehicle.
The Financial Consumer Agency of Canada (FCAC) said auto loans with terms of more than six years have become a trend in Canada, posing risks that consumers should consider carefully before financing a deal. It said the loans are costly for borrowers who must pay interest for a longer period of time than the five years that would traditionally be the case.
The FCAC said in a statement that long-term loans are especially expensive for consumers with low credit scores, who may be subject to higher interest rates. It warned some borrowers were buying new cars before their existing loans were fully paid off, rolling over their debt into a new loan and stepping onto what it called the “auto-debt treadmill.”
“Consumers must carefully examine their needs and their financial situation to ensure they can repay their car loans without undue strain, and with a full appreciation of the total interest charges and value of the car throughout the loan period,” said FCAC Commissioner Lucie Tedesco.
Canada’s auto finance market has nearly doubled in the last eight years, partly due to the offer of lower monthly payments on longer-term loans.
Automakers reported higher February sales in Canada, with some analysts rethinking earlier forecasts that Canadian light-vehicle demand would level off this year following a record breaking 2015.
Editing by Tom Brown