Scotiabank is predicting Canadian annual auto sales will break records, a reversal of its original forecast that sales would slow down somewhat in 2017.
Scotiabank raised its forecast from 1.94 million units to 2 million units in its Global auto report this week. If that forecast is correct, sales will outpace last year’s record-setting 1.98 million. The revised forecast isn’t too surprising if you’ve been keeping up with the monthly updates. Every month this year, the auto sector has been one of the top performing sectors in Canada.
But what exactly is driving these sales? It could just be the increase in wealth generated by rising home values. But it could also be an indication that Canadians are continuing to pile on the debt at a dangerous pace.
Two million cars sold translates a lot of car loans, the duration of which has been steadily rising in recent years, according to the Auto Finance: Market Trends study by the Financial Consumer Agency of Canada (FCAC). The report highlights how buyers are becoming too comfortable buying cars they can’t really afford over longer periods of time just because interest rates are so low.
Everywhere you look, you see a 0% financing offers being promoted. With more than three quarters of Canadians carrying a “good” or better credit score, there’s not much stopping people from going out and qualifying for a low interest car loan and spreading payments out over six, seven, or even eight year terms.
The problem with these longer term car loans is twofold. Not only do most cars lose most of their value after four years, increasing the likelihood that the owners will owe more than their car is worth, but there’s also the problem of people actually buying a new car and selling their previous one while they’re still on the hook for the previous car’s loan.That means they have to roll their previous loan into the new one, leaving them in an endless cycle of debt.
Long-term car loans can be a good choice for some car buyers, but it’s not for everyone. Be smart about how you take on debt.