More Canadians are failing to meet their car loan payments as short supply and the rising cost of borrowing have consumers feeling the pinch.
In the Bank of Canada’s Monetary Policy Report released Wednesday alongside its latest interest rate decision, the central bank said that delinquency rates for motor vehicle loans have surpassed pre-pandemic levels.
Shari Prymak, the executive director of Car Help Canada, told Global News Thursday that a shortage of cars over the past few years has driven up prices up to 40 per cent on new and used vehicles.
In addition, the interest rates on financing and leasing cars have also gone up along with the Bank of Canada’s increasing interest rates, Prymak said. He said the average interest rate for financing or leasing a car is now between seven and nine per cent, compared to five or six per cent previously.
“It’s more expensive to purchase a car now than ever before,” he said. “The debt load is just too much for many consumers to handle.”
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“People are having to default on payments on credit cards or auto loans in order to continue making those higher mortgage payments,” Stephen Brown, deputy chief North America economist with Capital Economics, told Global News Thursday.
“We see weakness in those auto loans, credit cards as a precursor to a weaker economy and job losses. That then triggers sort of higher delinquency rates for mortgages.”
Andrew King, an automotive consultant with Desrosiers, told Global News in an email that the average final transaction price for new vehicles in Canada has reached above $50,000 for the first time, but the percentage of consumers in arrears on their car payment remains low.
“The rate has been climbing since 2021 but still remains below 0.6 per cent — which isn’t particularly high compared to longtime patterns,” he said.
Rising interest rates across the board are contributing to the rise in defaulting on car loans, Prymak said, along with the higher cost of most goods due to inflation. However, he said that consumers often will prioritize making their car payments due to their reliance on a vehicle.
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Prymak suggested that those looking for help paying for a car could take out a line of credit as opposed to a regular loan.
He warned that a failure to deal with car payments could lead to negative equity, in which a resale can’t recoup the amount of debt obtained.
Prymak said that if you are having trouble paying the loan, you should commit yourself to the car and not try to trade it. Instead, he said to pay off the car as quickly as you can with lump sum payments, and when you are ready, you can lease a less expensive car.
Prymak said that it doesn’t seem like there will be price relief for consumers anytime soon given continuing supply chain issues and major strikes at manufacturers.
“When we have a shortage of new cars, the prices stay high,” he said.
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