84-month car loans and the negative equity nobody mentions

The average new-vehicle loan in Canada now runs 72 months, and terms of 84 and 96 months are on the menu at most dealers. Longer terms have gone from unusual to ordinary over the last decade. We are not going to quote you a share of the market, because the two datasets we trust disagree by roughly a factor of four about how big that share is and we would rather say nothing than say something we cannot stand behind. The direction is not in question.

The pitch for a long term is honest as far as it goes. Spread the same amount over more months and the monthly number drops. It is the only lever in the room that lowers a payment without lowering the price, so it is the lever that gets pulled.

What the pitch leaves out is the second thing a long term does, which is keep you underwater for years.

Why a car loan starts behind

Two lines matter. What you owe, and what the car is worth. They start apart and they close slowly.

On day one you owe more than the car is worth almost automatically, because the balance includes the tax and the fees you financed and the car’s value does not. Nobody buying your car secondhand pays you back the HST.

Then the two lines move in the wrong directions for you. Value drops fastest in the first year. Across all vehicles the five-year loss averages 41.8%, and it is front-loaded rather than spread evenly. Meanwhile your balance falls slowest at the start, because early payments are mostly interest. The longer the term, the more true that is.

The month the two lines cross is your break-even. Before it, selling costs you money out of pocket. After it, the car is an asset again.

The smaller payment is real. So is the extra money, and so are the extra months spent on the wrong side of the crossing. Market reporting on Canadian loans puts a vehicle financed over 84 months typically underwater for its first four to five years.

The trade-in rollover is where it bites

Being underwater on paper costs nothing. You keep driving, you keep paying, the lines eventually cross. The problem is that life does not wait for month 58.

You take a job in another city and need something different. The family grows. The car gets written off in a parking lot by somebody else. Any of those turns the gap into a bill, and the dealership has a very smooth answer for it: roll it into the next loan.

Here is what rolling it in actually does. The shortfall on the old car is added to the amount you finance on the new one, before tax and before interest. So you pay interest on the old car for the life of the new loan, and you start the new car further behind than the last one did. Do it twice and the third car is carrying two cars that are already gone.

When a long term is the right call anyway

This is not an argument for a 36-month loan you cannot afford. A payment that breaks your month is worse than a payment that lasts too long, and stretching a term to keep a household solvent is a reasonable trade made on purpose.

The conditions that make a long term survivable are specific. You plan to keep the car past the break-even month rather than to the end of the honeymoon. You put real money down, which pulls the crossing earlier. You buy something that holds value: our depreciation curve carries segment multipliers, and the spread between the slowest and the fastest segments is wider than most people expect. And you know your break-even month before you sign, rather than finding it out from a trade-in appraisal.

Run your own numbers with the term you are being offered, then run it again 24 months shorter. If the shorter one fits, take it. If it does not, at least you now know which month you stop being underwater, and you can plan around it instead of into it.