Not too long ago, the average car loan was amortized for five years, never longer. But, somewhere between the American financial crisis and today, car loans can now be amortized for significantly longer. In fact, according to an article written by CBC News, "More than half of all new car loans are currently financed for 84 months — seven years — or longer."

Furthermore, according to data from J.D. Power, between 2010 and 2015 the average monthly car payment rose from $522 to $542. Not only are Canadians extending their repayment terms but they are also choosing more expensive vehicles and thus taking on monthly payments that could be putting them in serious financial risk.

Why Are Canadians Choosing Unmanagable Car Loans?

This all begs the question; why are Canadian consumers choosing car loans that are putting financial stress on them now with the potential to cause further issues down the line?

It's Easier to Finance a New Car vs a Used One

Unfortunately, the reality of the situation is, it's easier for the average Canadian consumer to get approved for financing on a new car than a used one. The reason for this is because lenders know exactly what a new vehicle is worth, determining the value of a used vehicle is more difficult.  And if there is one thing that is certain, it's that a brand new car costs more than its used counterpart. Not to mention all the additional costs that come along with new cars; extended warranties, backup camera, sunroofs, etc.

We Aren't Thinking About The Long Term Consequences (or Our Long Term Goals)

The problem with a $500 car payment or an 84-month term is that they can seem like good decisions when you only think about how they affect your monthly finances. But it's the long term consequences that can cause serious problems.

While you may have the cash available to cover a $500 car payment every month, the benefit of taking that money and investing it or saving for an emergency greatly outweighs the convenience you get from driving a new car. Cut your car payment by a third and you'll have a couple of hundred dollars every month to invest for your retirement as well as put toward an emergency fund. You'll also be less likely to rely on credit to deal with an unexpected expense which can cause unnecessary debt.

Choosing an 84-month car loan means the monthly payments will be lower and therefore require less of your monthly income. For most consumers, this is very appealing. You can get the car you want, maybe something new and slightly out of your price range for a more affordable monthly price. But in the end, you'll be paying way more than what the car is worth and you'll be in debt for longer. Both of which make saving for the future and dealing with other expenses difficult.

Instant Gratification

Purchasing a new car is a great feeling, especially if you've spent years driving less than reliable hand-me-downs. Heading to a dealership, choosing the car you've always wanted, and qualifying for financing is often not that difficult. The auto industry is all too eager to get you behind the wheel. But just because it's possible to finance a $30,000 car, doesn't mean you should. When it comes to serious expenses like cars, we need to be making calculated decisions based on long-term goals and not on short-term gratification.

What You Need to Consider When Taking on a Car Loan

The fact of the matter is, most Canadian adults need a vehicle to get to work, purchase groceries for their families, and drive their children around. Having a car loan isn't the problem, it's having the wrong car loan that causes issues. When thinking about financing a car, you need to consider all aspects of the loan as well as how those aspects will affect your finances now and in the future.

Interest Rate

Just because you can afford the monthly payments doesn't mean you shouldn't consider the interest rate you're being charged. We all know that a higher interest rate increases the cost of borrowing, so make sure you're being offered one that is competitive.

Loan Term

As we discussed above, more than half of Canadian car loan terms are 84-months or longer. This is far too long, as the longer-term will only make your total cost of borrowing more expensive. Choosing a vehicle that you can afford to pay off within three or four years should be your goal. 

Additional Fees and Add-Ons

Often times, dealerships may not break down all the costs associated with purchasing a certain vehicle. This means you may not be aware that the sunroof you wanted or the bumper to bumper extended warranty increased your monthly payment by $100 or made it so you had to choose an 84-month term. Make sure you understand how all the fees and add-ons affect the cost of your loan.

Monthly Payment

In the end, you need to be able to comfortably afford your monthly payment. Just make sure you understand how that monthly payment was calculated.

Total Cost of Borrowing

At the end of your term, once you've made all your payments and own your car, how much will you have spent?

The Bottom Line

Vehicles are necessities for most Canadians, but the insurmountable debt doesn't need to be. Choosing an affordable used vehicle, saving up for a significant down payment, and finally choosing a loan term that is less than 84-months should be the goal of all Canadians looking to purchase a vehicle.

What does it mean to have good financial literacy? Being financially literate means having the knowledge to make decisions that will positively impact your financial health. As noted in the Relation between Financial Literacy, Financial Wellbeing and Financial Concerns, "the higher your financial literacy the greater your financial well-being." Tracking spending, budgeting, saving, and borrowing responsibly are typical behaviours that characterize people of high financial literacy. Here we'll go over how these behaviours affect financial literacy and thus, financial well being.

Controlling Your Finances With a Budget

Budgeting is a tool that can help you better understand your financial state. It creates a detailed image of your income and expenses, allowing you to allocate your resources accordingly and show you where you can save money. Moreover, according to the 2019 Canadian Financial Capability Survey (CFCS) commissioned by the Financial Consumer Agency of Canada, Canadians who budget were able to save money, manage their bills and control their monthly cashflow better than those who didn't. This can be seen in a survey we conducted (Financial Literacy vs. Financial Well-Being And Credit-Constrained Canadians) where we questioned credit-constrained Canadians with poor credit about their financial knowledge and credit habits. We found that 66% of respondents did not budget.

Saving For Emergencies

Furthermore, in our study, respondents who portrayed signs of poor financial literacy also did not save for emergencies (72%). As expected, people who did not save were ill-prepared for emergencies or unexpected expenses. This may be why 25% of respondents who loan stacked used the additional loan to cover an emergency. Financial literacy can help people understand how to manage their money more efficiently, spend more responsibly, and ultimately save more aggressively so that they may cover unexpected expenses and emergencies without having to take on debt. 

Tracking Your Spending

When you budget, tracking your spending is part of the process. Knowing where your money is going and coming from is an important part of improving your financial literacy and financial well-being. As mentioned, in our survey, respondents consisted mainly of credit-constrained individuals with low credit scores, which are telltale signs of poor financial health. That being said, our study found many did not track their spendings (43%), budget (66%), or save for emergencies (72%), key behaviours people of high financial literacy engage in.

By tracking your spending, you can learn about how your money moves and be able to identify key spending issues. Once you are aware of the issue, you can then take action to bring about good change to your financial health. For example, you may find that your social obligations are taking a huge chunk of your income or that your car expenses like maintenance, gas, and repairs cost more than you can afford. With insights like these, you can create a strategy to limit those expenses.

Understanding Borrowing Costs

There are three main factors that affect the cost of a loan: interest, loan term, and principal. Understanding how these three factors impact the cost is essential in making good borrowing decisions. Borrowing without a proper understanding of the costs can leave you with unaffordable payments, high interest, and too much debt to manage on your own.

With borrowing being an integral part of our lives as we age, it makes sense that people with high financial literacy would have a greater financial well being as they have the knowledge to make good borrowing decisions. Taking a look at our survey, we notice that only 44% of Canadians who are credit-constrained, a sign of poor financial well-being, could properly identify the factors that affect the cost of a loan. As such, being educated on these basic factors will not only help you improve your financial literacy but will, in the end, allow you to make better financial decisions.

Bottom Line

Your financial well-being can undoubtedly affect the quality of your life. Poor financial literacy can lead to poor savings, poor financial control, and overall leave you feeling defeated about your financial situation. But you can improve all this by increasing your financial literacy through good financial behaviours as mentioned. Reading and asking for advice are also important practices that can help you be more aware of how your decisions and habits affect your finances. Ultimately, gaining high financial literacy will help you manage your money responsibly and thus lead you to greater financial well-being. 

Simple Money Advice

Do you remember the last piece of really good money advice that you got? Who did you get it from? Was it your parents, your co-worker, your neighbour? Was it from a magazine at the dentist’s office or an inspirational Pinterest board? Where ever you heard it, chances are you remember it because it resonated deeply with you.

Below are some of the most common but smartest ‘money clichés’ that you’ve probably heard – and maybe some that you haven’t!

  • The quickest way to double your money is to fold it in half.

This sage piece of advice really breaks down to this simplistic way of thinking: if you want to save money, stop spending. Put those bills back in your pocket and put away your plastic. Money trickles through people’s fingers because they can’t stop spending. Really thinking about your discretionary spending – not going to grab that daily coffee, for example – is one fast way to financial security and prosperity.

  •  Pay yourself first.

This popular adage is well known for a reason. People who put away their money into a savings account or into an emergency fund are more likely to stay out of the red if a financial surprise pops up. By paying yourself first, you ensure that all of your needs are met. Oftentimes I see individuals that dole out too much of their paycheque towards debt repayment, which leaves them with a shortfall for the rest of the month. The consequence? They have to rely on credit to fill the gap, which results in a cycle of debt and repayment. Ensure that you allocate an adequate amount towards debt repayment so that it actually gets paid down in a realistic time frame (aim for 5 years or less), but don’t overextend yourself.

  • Never loan money that you expect to get back.

If you’ve ever lent money to family or friends and lost the relationship over it, you already know this one to be true. Throughout my career, I’ve seen many personal relationships sabotaged by the lending of money – of course, only when it’s not paid back. Truthfully, lending money to friends and family is really not a great idea, for obvious reasons. But here’s another not so obvious reason – if the person can’t pay it back, for whatever reason, they may feel guilty for taking it in the first place. Avoid the awkwardness, resentment, and confusion that often accompanies personal loans by only lending money that you can afford to lose.

  • Pay for everything in cash.

This is a good one for people who are trying to ebb the steady stream of money that seems to flow out faster than it comes in. In this day in age, however, the high cost of housing and post-secondary education make some forms of debt unavoidable. Paying for everyday household expenses in cash is a great way to jump-start your savings and track your spending. Putting the brakes on using your credit cards will encourage you to stop unnecessary spending and plan ahead for your purchases. Ensure that you have a tracking system in place for your cash, because as we all know how quickly cash seems to disappear.

  • “The price of anything is the amount of life you exchange for it.” Henry David Thoreau

Every time that you buy something, you are exchanging a piece of your life for material goods. ‘Your life,’ in essence, is truly your time, as it is the only finite resource that you have as a human being (besides the natural resources of our planet). So, when you purchase that new nail polish, book, or kitchen gadget, you are really saying “I am willing to give up my time for this item.” Obviously, we all have to give up our time for possessions – we have to have a home to live in and clothing to wear and food to eat. However, it seems that many people have forgotten a basic principle – the more time that you spend working to buy things that you don’t need, the less time you have with family and friends. Your time can be spent enriching your life through relationships, hobbies, interests, volunteerism, traveling – whatever makes you content. Use your time and your money wisely.

Money advice is everywhere these days, but sometimes it is the basic advice that truly resonates and sticks in our minds. Write your favourite pieces of advice down in your journal, on your blog, or on notes on your fridge. Pause and reflect on the true essence of the message that you are reading.

What is your favourite piece of money advice? Please share with us!

Solutions Credit Counselling Service Inc.

Your Credit Education Specialists!

www.creditsolutions.ca

www.debtcanada.ca

1 877 588 9491 ext. 120

OWN YOUR POTENTIAL

                                                engage, explore, evolve

 

Potential: (adj.) Capable of being but not yet in existence. (Noun)The inherent ability or capacity for growth, development, or coming into being.

What is it - that something that you are looking forward to?” What is the common ground between this question and my time spent interviewing Margaret Johnson for this column?

The wise teen poising the question set out to deliver the message that no matter our age, individuals need something to dream for, to look forward to and aim toward the stars for. Children are thrilled at the mere thought of new possibilities each moment of their day. They carry themselves with wild abandonment in the pursuit of the next experience. This type of energy is brilliant. Those who witness it in adults invariably ask “What is it about her that she exudes such vibrancy and verve for life?” Margaret Johnson is in the business of guiding individuals to leverage their debt, so they can literally buy back their freedom and regain belief in the dream for new possibilities, for owning more of their potential.

Margaret is, engaging, compassionate and one of the best listeners I have ever come across. She has built a national clientele on the premise of listening to one client at a time to determine tailored solutions for their debt and credit challenges. She is a rare bird in her non-judgmental approach to clients arriving at her door with a mountain of debt. “It only takes one major life crisis to take an otherwise financially healthy individual down into a dark, deep hole of despair”. Her favorite saying is “It’s not about the money; it’s all about the money”. She believes that fear crafted this statement. “We would like to think that life and happiness are not about money. The reality is, it is all about the money. For those who do not have it, there is not too much peace, safety or rest because they worry all the time – life without money is a struggle and difficult. The statement means something different to every person. Being alive is about survival - money or lack thereof. More money doesn’t translate into more happiness but individuals with money are less fearful for the basic things in life. This affords them the luxury of space and resources to look forward to new possibilities with a bit more ease”.

I thought it appropriate to ask Margaret her definition of success given her livelihood.

“I define success as having the freedom to change. I changed through extreme adversity. I knew I’d be ok as a result of feeling more freedom through growing from change. I finally understood that I had the freedom to create my life the way I wanted to have it and not feel responsible or accountable to other people for what I believed. When you let go of being attached to worry associated with what others think, and you come to realize the only thing you are in control of is you, then you have the ultimate power and can set out to make yourself happy, and in turn, impact others – that’s success to me.”

I asked Margaret her sentiments on provoking clients to be more congruent with their present financial circumstances as it relates to fear influencing the outcome of their dreams.

”We strive to give each client an education because it translates into awareness and power. Something happened in their life that has driven them to find us because they are fearful. We take away their fear and replace it with knowledge which gives them the power to make other choices. When they leave our program, they are debt-free. It is a realized dream that they never knew if they could succeed at…Power is being able to make choices and see those choices through to completion. It’s about understanding the scope of choices, that all is ok as is, even if it is not the ideal. Power in this scenario equals one's perception of personal safety which creates personal happiness”.

So, back to the wise teen Miss question. “What is it - that something you are looking forward to?” Teen Miss asked me this in context to what possibilities I am dreaming of beyond realization of my present goals and responsibilities which are in full motion – some to create a terrific lifestyle full of purpose, some, part of life’s daily necessities and some, dreams in process. Her question served to provoke me to: continue to dream big as I explore my future; to awake the bubbling excitement for who I will evolve into; to live with a purpose that positively impacts something way beyond my own needs; to capture the child-like thrill in launching new possibilities for myself and those I am surrounded by; to align myself with individuals who are constantly becoming.

In order to remain young in body, heart, and spirit, it is imperative to “look forward” and be engaged in new possibilities.

When was the last time you felt the child-like thrill when looking forward to something?

Margaret has 35 plus years experience in the financial industry. A leader in the field of credit counseling, a distinguished speaker and a respected member of the community, Margaret is known for her sage advice and her fight for the consumer. Margaret can be reached at her company Solutions Credit Counseling at 604 588-9491 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..

Interestingly, a recent survey (http://www.huffingtonpost.ca/2015/03/02/credit-card-debt-denial-canada_n_6784570.html) suggests that nearly one quarter of Canadians underestimate how their debt stacks up against the national average (hint: they owe more than the national average).  On the other hand, the number of Canadians with no credit card debt is growing.  From the findings outlined in this article and the survey, it appears that some Canadians are complacent with their debt, while others are being successful at getting out of it. 

The idea that Canadians are comfortable with their debt is a troubling trend.  It’s something that I’ve experienced personally, as a financial professional – the complacency that comes with being in debt for months, years.  One day you’re pulling out your credit card to pay for that dinner date with your girlfriend - what’s the big deal, anyways?  You only owe a few hundred dollars on the card.  Fast forward a few years….you’re paying for a trip to Disneyland on plastic, simply because “it’s the right time to take the kids, before they get too old.”  Then the radiator in the car breaks, and you use your plastic at the body shop.  On the way home you stop for a coffee and takeout, because you’re exhausted.  And then, one day, you realize you’ve put your entire life on plastic.

If someone were to ask you, up front, about your behaviour – what would you say?  Would you own up to it?  Or would you chime in that everyone has debt, so it’s not a big deal?  

In years past, having debt was shameful; for baby boomers and younger, debt is becoming commonplace  It’s being used to excuse car purchases, houseware items, clothing, cosmetics, eating out, entertainment purchases, vacations, home renovations…..if you can think of it, it’s being put on plastic or a line of credit.  The idea of ‘wants’ and ‘needs’ has shifted to an almost indecipherable level, with the two constantly being confused in our modern age.  Clients will tell me that their children (as young as 10) ‘need’ a cell phone for safety reasons.  When I question why their child needs a brand new Iphone instead of a modest, older model phone (or the one you usually get for free with a contract), usually there is no direct answer provided.  Public school teachers have often told me that there are students in their classrooms who have brand new phones but no lunch in their backpack.  The idea that a want has transformed into a need doesn’t only apply to technology; it can also be linked to addictions such as caffeine, nicotine, gambling, television, or shopping.  I’ve even heard one person describe makeup as a need.   A need used to be (and still is for many families) answered by the question “What do I need to survive?” – for many middle-class families it has become “What do I need to be comfortable?”  Comfort often comes with a high price tag and the gap is filled by credit.       

So, how do you even know that you are in debt denial? 

You might be in debt denial if you:

Make excuses for why you have debt.

Compare your amount of debt to other people’s debt load.

Lament that ‘Everyone is in debt, so it doesn’t really matter.’

Shuffle debt from one source to another while claiming that you are making regular debt repayments.

Keep overspending and using credit even though you’re heavily in debt. 

Justify using your credit cards for every purchase to collect points (to get more things you probably don’t need) – and you can’t pay off the balance in full. 

Throw away or recycle (or otherwise ignore) your bank and credit statements before you’ve reconciled them. 

Lie to others amount your debt amount or what you spent your debt on. 

Borrow from family members and friends to bridge the financial gap. 

Claim that something is a need (a kitchen appliance, like a basic model fridge) when it’s a want (a complete kitchen renovation).

So, what’s the fallout from confusing a need and a want, and ultimately, debt complacency?

The obvious answer is that a person will never get out of debt – they will simple rotate their debt throughout their lives and ultimately transfer that debt to their estate upon their death (remember: debt doesn’t transfer upon death UNLESS you’ve signed on the dotted line yourself!).  Another possibility is that retirement could be pushed back, or the equity taken out of a paid in full home to pay off debt.  Dwindling emergency savings, constant stress and anxiety, concern of family members and friends, low self-esteem, and possible financial fallout (bankruptcy or a judgement from creditors) can all be a result of debt denial.  Failure to confront debt isn’t that uncommon, but the reality is that you do have to face it in one way or another.  Admitting your debt denial, getting professional financial guidance to help you get out of debt, and sticking to a realistic budget are the first steps to moving away from financial complacency and toward financial freedom.  

Remember, if you are experiencing financial difficulties do not wait. Call Solutions Credit Counselling at 1(877)588-9491 or fill out our Debt Consolidation Questionnaire and get your Free Credit Counselling Advice today.

For more information visit Debt Canada - your Canadian credit education centre.

If you are a woman in debt, speak with Women and Money first. We specialize in helping women with their personal and business financeMoney management advice you can count on!


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