"Because long-term car loans tend to involve lower monthly or bi-weekly payments, extended terms can encourage consumers to buy more car than they may be able to afford," said Kathryn Dunn, a spokeswoman for the Financial Consumer Agency of Canada
This new financing trend has made it easier for consumers to pile on debt, further extending already over-leveraged households.
According to Statistics Canada, households have amassed huge debt, with the ratio of debt to disposable income at a near record of 166.9 percent during the first quarter of 2017.
The increase comes at a time when the Bank of Canada is likely to raise interest rates again this year, after the first interest rate hike in seven years in July.
More than half of Canadians who borrow to buy new vehicles look to make payments every two weeks, with the arrival of their paychecks, said Robert Karwel, a senior manager for J.D. Power in Canada.
Some borrowers are opting to pay even more frequently with four percent making payments each week during the first half of 2017, up from 3.4 percent in 2015, the J.D. Power data show.
"These terms don't allow you to pay off the car any faster, so it's questionable why it is being taken-up by customers," Karwel said. "We feel it has to do with the amount of stress the family budget is under."
Consumer appetite for weekly payments has been fueled by advertisements which tout smaller amounts that are paid in more frequent installments, said George Iny, director of the Automobile Protection Association, a Canadian consumer advocacy group.
Iny said he believes the proportion of borrowers opting for weekly payments would be even higher than the data suggests, but some financial institutions accustomed to monthly and bi-weekly installments, have not yet produced the paperwork needed for such frequent payments.
"Psychologically, the amount sounds lower. It allows you to buy without feeling guilty," he said.
Still, delinquency rates on Canada's C$120 billion ($94.7 billion) in auto loans remained low at 1.7 percent during the first quarter of 2017, relatively flat from the same period a year ago, according to June data from credit information company TransUnion.
(Reporting By Allison Lampert; editing by Diane Craft)
By Allison Lampert