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OMVIC Blog: Car Buying Tips

Three questions to ask before taking on a long-term car loan

Oct 20

Written by: OMVIC Communications
Wednesday, October 20, 2021  RssIcon

Getting a vehicle loan may seem like a simple way to make buying a car more attainable. However, consumers must do their research before taking on a long-term loan to avoid negative equity and protect their personal finances.

What is negative equity?

Negative equity means owing more for a car than what it’s worth. Say you decide to buy a car and take out a three-year loan: with this short-term loan, monthly payments will be higher.

If you take out an extended-term loan lasting between six and nine years, the monthly payments become more affordable. But by the time you pay off your loan, your car may have significantly depreciated in value, and you now end up owing more for a car than what it’s worth. Furthermore, if you want to trade the car in for something else before you’ve finished paying off the loan, this could result in heavy additional costs.

Three questions you should ask yourself before taking on a long-term loan

Before taking on a long-term loan, ask yourself the following three questions and take the time to assess if the vehicle is right for you.

1. How much do I drive?

Think about how frequently you drive. How long does it take you to get to work, and how often do you plan on heading into the office? Do you go on road trips? Where do you plan on driving? Greater mileage will depreciate your car faster, hurting its trade-in value. If you take an extended-term loan, it may mean you have to delay your next purchase until you’ve fully paid off the vehicle.

2. How long will I keep this vehicle?

Take a moment to consider if the length of time you plan on keeping this vehicle works with the timeline of your loan. Do you plan on keeping the car for your teenager? Is it a fixer-upper? A starter car? If you only plan on driving this vehicle for a short time, it may not be smart to take an extended-term loan.

3. How fast will this car depreciate?

Ask the dealer how fast the car will depreciate. If you’re frequently driving a car that depreciates quickly and you plan on keeping the vehicle for only a few years, you should think very carefully about taking on a long-term loan.

How OMVIC can help

The best way to avoid negative equity is to think long-term and do your research before you commit to a vehicle. Don't focus on just the car payments you think you can afford. Be honest with yourself about what you need from a car, and most importantly, what you can afford.

Have questions about negative equity? Reach out to OMVIC’s consumers support team at consumers@omvic.on.ca or by calling 1-800-943-6002. Our team of experts can answer your questions and direct you to helpful resources, so you make an informed decision.

 

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