Saturday, November 29, 2014

Canada's Auto Loan Bubble



An article in the Financial Post points to a ticking time bomb in the Canadian economy in the way of the auto loan bubble which has seen many Canadians roll old debt into new car debt. One example in the article points to a person with a $55,000 debt written against a $35,000 automobile.

A person wanted to be a draft technologist and calculated that one day he'd be making more than enough money to pay off his student loan.

But he needed a car to do that. And that led to another kind of debt: A car loan. That loan will now take him another seven years to pay off. When it is finally done the now 42-year-old will have paid $55,000 for a 2014 Nissan Altima that would have cost him $18,000 if he'd just paid for it outright.

The article also details the explosion in car loans to Canadian consumers climbing from $18.87B in 2004 to a staggering $63.86B in 2013.

The chief executive of the Credit Counseling Society warns a growing number of consumers are getting themselves into the type of credit traps that could turn ugly. He went on to warn that in a manageable scenario no more than 20% of take-home pay should go towards non-mortgage debt. Going beyond that and you are flirting with disaster. That 20% is a maximum he says.

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