Canadians naive about how long they’ll be in debt

[nik-]

Sheesh ... I can get people not including mortgages as debt (I myself consider it debt) but auto loans? Really?

[chemgear]

Originally Posted by nik-

Sheesh ... I can get people not including mortgages as debt (I myself consider it debt) but auto loans? Really?

Well, when you're pushing auto loans to 6, 7, EIGHT freaking years . . . you probably try to avoid thinking about it.

http://business.financialpost.com/20...debt-problems/

[Street Pharmacist]

Originally Posted by chemgear

Well, when you're pushing auto loans to 6, 7, EIGHT freaking years . . . you probably try to avoid thinking about it.

http://business.financialpost.com/20...debt-problems/

Six years at 0%? I could afford to buy it outright, but why would I?

[GP_Matt]

Originally Posted by Street Pharmacist

Six years at 0%? I could afford to buy it outright, but why would I?

It is never 0% though. You pay for the interest in the price of the vehicle. It is just a juggling game.

[squiggs96]

Originally Posted by GP_Matt

It is never 0% though. You pay for the interest in the price of the vehicle. It is just a juggling game.

I agree with you, but what I find weird is what happens when you pay it off. At the beginning there is imputed interest, which usually can be figured out pretty easily. I bought a car in 2005 and financed it at "0% interest" over five years from GMAC through the dealership. When there was a year left on the payments I called GMAC and asked how much they'd accept for me to pay the balance in full. There was about $6,000 left (12 payment of $500), and they said they wanted all $6,000. They said that because it was true 0% financing, there was no interest component, and the principal portion was still $6,000. With a 3% interest rate, the PV of the payments was about $5,900. I was hoping they'd want the money now, and not have to worry about collections. I was also hoping I could get a bit of a deal and maybe settle at $5,750 or so. They wouldn't agree to any discount, so I paid the remaining 12 months off at the regular installments.

Side note, I love how people don't consider mortgage to be debt. It makes me smile each time.

[undercoverbrother]

Originally Posted by squiggs96

I agree with you, but what I find weird is what happens when you pay it off. At the beginning there is imputed interest, which usually can be figured out pretty easily. I bought a car in 2005 and financed it at "0% interest" over five years from GMAC through the dealership. When there was a year left on the payments I called GMAC and asked how much they'd accept for me to pay the balance in full. There was about $6,000 left (12 payment of $500), and they said they wanted all $6,000. They said that because it was true 0% financing, there was no interest component, and the principal portion was still $6,000. With a 3% interest rate, the PV of the payments was about $5,900. I was hoping they'd want the money now, and not have to worry about collections. I was also hoping I could get a bit of a deal and maybe settle at $5,750 or so. They wouldn't agree to any discount, so I paid the remaining 12 months off at the regular installments.

Side note, I love how people don't consider mortgage to be debt. It makes me smile each time.

There is good debt and bad debt. In my opinion.

A mortgage is good debt, if the house you purchase is within your means. If you are house poor, then I would argue that is bad debt.

Cars are bad debt across the board IMO. Everytime I look at our vehicles I see two burning piles of money, just try to keep the pile as small as possible.

[Street Pharmacist]

Originally Posted by GP_Matt

It is never 0% though. You pay for the interest in the price of the vehicle. It is just a juggling game.

True, but if that price is the same for a 3yr, 5yr or 6yr loan at 0%, why would you ever choose anything but the 6yr loan. With inflation it's by far the cheapest option

[squiggs96]

Originally Posted by undercoverbrother

There is good debt and bad debt. In my opinion.

A mortgage is good debt, if the house you purchase is within your means. If you are house poor, then I would argue that is bad debt.

Cars are bad debt across the board IMO. Everytime I look at our vehicles I see two burning piles of money, just try to keep the pile as small as possible.

I never once said that there isn't good debt or bad debt. It doesn't matter which one it is, it is still debt. I was more referencing the poll and discussion that's been carried out here on CP a few times.

I wouldn't say car debt is always bad. Some people like to lease cars, as they feel it's more cost effective, and you aren't using your own money. Pylon has many stories about this. I bought my old boss's car at the end of his lease. BMW was offering 5 or 6% financing, so I paid cash for it. If they were offering 1 or 2%, I likely would have financed it over 2-3 years. I wouldn't have felt trapped or thought of it as a burning pile of money.

The 8 year new car loans that I've seen advertised look dangerous to me, especially with how quickly cars lose their value in the first few years. The loan to value of the car could leave people under water for 85-90% of the loan term. Most of these people will want a different car before the car is paid off, and thus would be better off leasing. Actually they'd be better off buying a used car at less money and paying it off sooner, but some people want new cars and can't be talked out of it. That was also a fun thread here.

[undercoverbrother]

Originally Posted by squiggs96

I never once said that there isn't good debt or bad debt. It doesn't matter which one it is, it is still debt. I was more referencing the poll and discussion that's been carried out here on CP a few times.

I wouldn't say car debt is always bad. Some people like to lease cars, as they feel it's more cost effective, and you aren't using your own money. Pylon has many stories about this. I bought my old boss's car at the end of his lease. BMW was offering 5 or 6% financing, so I paid cash for it. If they were offering 1 or 2%, I likely would have financed it over 2-3 years. I wouldn't have felt trapped or thought of it as a burning pile of money.

The 8 year new car loans that I've seen advertised look dangerous to me, especially with how quickly cars lose their value in the first few years. The loan to value of the car could leave people under water for 85-90% of the loan term. Most of these people will want a different car before the car is paid off, and thus would be better off leasing. Actually they'd be better off buying a used car at less money and paying it off sooner, but some people want new cars and can't be talked out of it. That was also a fun thread here.

Wasn't a shot at you squiggs.

[Muta]

I don't know if it's a federal or provincial rule, but you're now allowed to put more down on your vehicle than what you owe per month.

For example, if you have that eight-year financing plan (at whatever %, mine's at 0%)... you can put down a large chunk whenever you want and pay it off much quicker.

[GP_Matt]

Originally Posted by Street Pharmacist

True, but if that price is the same for a 3yr, 5yr or 6yr loan at 0%, why would you ever choose anything but the 6yr loan. With inflation it's by far the cheapest option

I don't know for sure, but I am pretty sure you can get a lower purchase price if you finance for a shorter period.
To prove it, tell them up front that you want to finance for three years and negotiate to the best of your ability. Then ask if the offer still stands if you double the financing term.

[Canehdianman]

Originally Posted by Muta

I don't know if it's a federal or provincial rule, but you're now allowed to put more down on your vehicle than what you owe per month.

For example, if you have that eight-year financing plan (at whatever %, mine's at 0%)... you can put down a large chunk whenever you want and pay it off much quicker.

I'm not positive, but if you are referring to the ability to repay your financed amount at a faster rate than what you signed up for (i.e. you want to pay $500 a month on your $300 a month car loan), it is called an 'open' loan.

I believe that all car loans in Canada are open.

[Street Pharmacist]

Originally Posted by GP_Matt

I don't know for sure, but I am pretty sure you can get a lower purchase price if you finance for a shorter period.
To prove it, tell them up front that you want to finance for three years and negotiate to the best of your ability. Then ask if the offer still stands if you double the financing term.

I bought the car from a friend who's the sales manager, agreed on a price, then got the financing

[Flash Walken]

Last week, the Bank of Canada cautioned that “high consumer debt loads and imbalances in the housing market” are making Canada’s financial system more vulnerable, and “remain a concern.” The housing market remains stubbornly strong, despite prices that, by the central bank’s new estimates, are between 10 and 30 per cent overvalued.

“Given the record debt ratio, there’s nothing here to change the Bank of Canada’s view that high household debt is a significant risk to financial stability. However, the downward revision to the debt figures and continued strength in net worth should keep concerns from worsening,” said Bank of Montreal senior economist Benjamin Reitzes in a research note.

Separately, the Canadian Real Estate Association reported that new-house sales were flat in November compared with October, and were up 2.7 per cent from a year earlier. CREA said year-to-date sales are up 5 per cent from the same period in 2013, but are a more modest 2.4 per cent above the 10-year average. The MLS Home Price Index was up 5.2 per cent from a year earlier, down slightly from October.

“The Canadian housing market remains a story about how sales and prices are still running strong in some areas while others are seeing subdued levels of activity with slower price gains or modest price declines,” said CREA president Beth Crosbie in a news release.

The Statscan debt report, which also covers corporate and public-sector debt, said total government deficits were $7.2-billion at the end of the third quarter, down from $10.4-billion a year earlier. The federal government’s net-debt-to-GDP ratio, a key measure of the country’s government debt burden, was 31.5 per cent, down slightly from 31.8 per cent in the second quarter.

Meanwhile, the non-financial corporate credit-market-debt-to-equity ratio, a key measure of the corporate debt burden, rose slightly to 58.5 per cent in the third quarter from 57.4 per cent in the second quarter. The ratio is at a post-recession high, but remains tame by pre-recession historical standards.

Economists said the recent sharp drop in oil prices could elevate the risks surrounding the country’s debt levels, as it poses a threat both to the country’s total incomes and to the health of some of the country’s more bloated regional housing markets.

“The recent collapse in oil prices likely to have an adverse effect on Canada's growth over the next year, and particularly on incomes in oil-producing regions. Now, household debt risks are heating up once again,” said Toronto-Dominion Bank economist Leslie Preston.

http://www.theglobeandmail.com/globe...ticle22082881/

[chemgear]

http://www.cbc.ca/news/business/the-...orry-1.3106533

For the Toronto-area couple, it all started back in 2009 with a lavish $78,000 wedding.

Then came numerous overseas vacations. When touring Egypt, Ali bought four souvenir papyrus scrolls for $6,000. In Italy, Haji picked up a $7,000 Chanel bag.

After the birth of their daughter, the couple moved into a newly built home and spent more than $100,000 on upgrades, including a custom kitchen, hardwood floors and a high-tech fireplace.

The wedding, trips and high-end purchases were made possible with cash from two home equity lines of credit secured against a couple of investment condos the family owns. The debt from those loans now totals $370,000. They also recently got an unsecured $30,000 line of credit to buy solar panels for their new house.

"We are addicted for sure. Who wouldn't be addicted to something so easy [to get]?" says 35-year-old Ali about the free-flowing lines of credit that have enabled him to splurge on the finer things in life.

But the place is still largely unfurnished and he's yearning to install a $40,000 glass railing for the staircase.

"Without the glass railing, the look of my stairs is not doing it justice," he says.

[undercoverbrother]

Originally Posted by chemgear

http://www.cbc.ca/news/business/the-...orry-1.3106533

For the Toronto-area couple, it all started back in 2009 with a lavish $78,000 wedding.

Then came numerous overseas vacations. When touring Egypt, Ali bought four souvenir papyrus scrolls for $6,000. In Italy, Haji picked up a $7,000 Chanel bag.

After the birth of their daughter, the couple moved into a newly built home and spent more than $100,000 on upgrades, including a custom kitchen, hardwood floors and a high-tech fireplace.

The wedding, trips and high-end purchases were made possible with cash from two home equity lines of credit secured against a couple of investment condos the family owns. The debt from those loans now totals $370,000. They also recently got an unsecured $30,000 line of credit to buy solar panels for their new house.

"We are addicted for sure. Who wouldn't be addicted to something so easy [to get]?" says 35-year-old Ali about the free-flowing lines of credit that have enabled him to splurge on the finer things in life.

But the place is still largely unfurnished and he's yearning to install a $40,000 glass railing for the staircase.

"Without the glass railing, the look of my stairs is not doing it justice," he says.

Idiots

[Fighting Banana Slug]

^^ Yikes.
On the mortgage issues, I have been on both sides of the equation. In retrospect, I was fortunate to buy my first house in 1998. "Retrospect" being the operative word, as I was convinced at the time that I would be the only guy in Calgary whose house went down in value. Put 25% down and banged out extra mortgage payments and was debt free in under 10 years. Those were the days.
Now, I still have that house as an investment property. Took out an LOC as part of that rental business. Now have a much larger mortgage, as I now live in the 'burbs with a bigger house and family.
Bottom line: went from debt free to debt laden (mortgage only-don't believe in car loans). However, the NAV is much higher, lifestyle is decent and my savings in RRSP, pension and other retirement vehicles is maxed out. I don't necessarily think being in debt is bad thing.

[rubecube]

Kind of sidebar, but I really wonder how much credit has increased inflation and contributed to the stagnation of middle-class wages. I'm sure I could probably Google the answer.

[nik-]

$370000 on top of their mortgage?!

My mortgage is literally my only debt and it still feels like a boulder on my chest. I can't imagine living with that much debt hanging over you.

[rubecube]

Yeah, that didn't take long. I (surprisingly) don't find Forbes to be that good of source on most things, but interesting to read.

http://www.forbes.com/sites/moneybui...t-the-economy/