Bank Of Canada Warns Of Rise In Risky Auto Loans

The Bank Of Canada warns of rise in risky auto loans as consumers with auto debt reaches an all time high. In the past 8 years auto loan debt has doubled to more than $120 billion, which is more than any other type of household debt!

On Wednesday, the Bank Of Canada added it’s statements to the growing concerns of other groups such as analysts, consumer advocacy groups, bankers, as well as senior auto industry executives.

The bank stated that this rise in auto loan debt is particularly hazardous to individuals who are already stretched too thin with their prior debt and that the issue should be monitored.

The two factors they mentioned which were important to watch include the fact that the increase of loans to people with bad credit has taken over 25% of the market. As well as the fact that the loans being issued are longer term loans as well as loans that encompass a higher percentage of the value of the vehicle.

The growth in longer term loans has actually helped the Canadian economy by boosting auto sales. However, experts agree that consumers should try to stick to shorter term auto loans or simply lease vehicles instead of buying them.

The longer the car loan the lower the monthly payments which seems to be encouraging consumers to take the longer term loans. The danger lies when they wish to trade in the vehicle before their loan is up. That’s when they often find out that the amount they owe is less than the vehicles worth.

This then leads to the consumer getting a loan for another new car while still paying off the residual balance from their previous loan.

The average length for a car loan in Canada has topped out at around 74 months which happened to be around 63 months in 2009. According to J.D. Power & Associates over 69% of loans in Canada exceed 6 years.

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