Retailers and financial institutions are offering the possibility of financing the purchase of a good over increasingly long periods. Personal loans, installment sales, long-term leases and financing plans now make it possible to make low periodic payments and take up to 8 years to pay off a car, 4 years to pay off a piece of furniture or 15 years to pay off a swimming pool.
Extending the term of a loan enables merchants to attract consumers by offering low periodic payments. To further reduce this amount, bi-weekly or even weekly payments are offered instead of monthly payments. In their advertising, merchants highlight this low periodic payment, leaving out essential information such as the amount of the consumer's total obligation or the total duration of the term, which are often written in small print or in abstruse language.
To convince consumers, they are sometimes told that it is more advantageous to buy on credit than to pay cash, or offered bonuses if they sign up to a financing plan. Some banks even encourage consumers to buy more expensive goods than they had planned by extending the term of their loan.
According to our impact survey, consumers are sensitive to these strategies. The low amount of the recurring payment is one of the most important points in consumers' decision-making process. Similarly, many consumers consider that they would not have been able to afford to buy a property without financing; more than half of respondents also said that long-term financing enabled them to buy a more expensive property than they had initially planned. Others added that the ease of accessing credit and managing the payment within their budget were reasons why they chose long-term financing.
In short, long-term financing poses risks of over-consumption and over-indebtedness. In response, the law does not regulate the duration of property financing. However, certain provisions of the laws of Canada, the United States, France and Australia offer interesting solutions.
These include compulsory information to be included in credit advertisements and contracts, advertising standards for displaying periodic payments and encouraging the purchase of goods using credit, the withdrawal period, the option of repaying the debt at any time, or the rights granted by law in the event of forfeiture of the benefit of the term.
While these legal solutions are certainly relevant, they would appear to be insufficient without the incorporation into the law of principles designed to make lenders more accountable. Beyond capping the amortization period of a credit agreement, a truly effective approach to solving the problems raised by long-term financing involves making lenders more accountable. In this respect, Canada would do well to draw inspiration from the responsible lending legislation found in France and Australia.
