Eight-year auto loans boost sales and worsen debt problems for Canadians

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Longer-term loans have helped drive vehicle sales to an all-time high, but it also raises concerns that Canadians are ignoring warnings of unsustainable debt growth.

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Kelly Collins chose to extend the loan of her new red Dodge Journey for one year because she wanted lower monthly payments, an increasingly common practice in indebted Canada.

[np_storybar title=”Canada’s cheap car loans have eerie trappings of housing crisis” link=”http://financialpost.com/2013/02/09/canadas-cheap-car-loans-has-eerie-trappings-of-housing-crisis/”]With extended amortizations on auto loans and no down payment required, the auto sector is the fastest growing consumer debt sector in Canada. Read on
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“They were really kind enough to let me customize,” said Collins, who opted to go beyond a five-year term after being given the option to expedite the repayment if she had the extra money.

The average loan term for a light vehicle in Canada is 69 months, close to a peak of 72 months set in the third quarter of 2013, according to data from marketing information firm JD Power. The borrowing comes on top of signs that Canadians continue to buy big ticket items and ignore warnings of unsustainable debt growth.

Longer-term auto loans leave Canadians in debt longer, said Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ont., In a telephone interview. “On a 96 month loan, it takes over 80 months before you’re back in the money,” he said.

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Policymakers have called near-record consumer debt levels the main domestic risk to the Canadian economy. While Bank of Canada Governor Stephen Poloz says household debt-to-income ratio is expected to stabilize around current levels, most of the government’s warnings, as well as its actions, have been directed against the debt. mortgage. The finance ministry has tightened rules on mortgage insurance in an attempt to cool a housing market that the International Monetary Fund has called a “key vulnerability.”

There has been no similar government intervention in the auto market, where long-term loans fuel purchases, according to Equifax Canada Co. The credit monitoring company reported in March that demand for credit automobile had increased 9% in the fourth quarter compared to the previous year. loans over 72 months being the main impetus. Canadian sales of cars and light trucks will hit a record 1.77 million this year, up from 1.74 million last year, according to Carlos Gomes, an industry economist at the Bank of Nova Scotia in Toronto.

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Unprecedented sales

Light trucks topped unprecedented new vehicle sales of 197,740 units in May, Statistics Canada said on July 23, taking retail sales to a record $ 42.0 billion. About 37 cents of every retail dollar spent that month was auto-related, compared to about 31 cents in the United States. The agency reports retail sales for June August 22 in Ottawa.

“Canadian consumers have ‘held the economic fort’ as exports and business spending lag behind previous recoveries,” wrote Peter Buchanan, economist at CIBC World Markets in Toronto, in a report providing an overview of the market. report this week. “While July saw a strong rebound in auto sales, their ability to do so indefinitely is questionable.”

The Bank of Canada is counting on rising exports and business investment to take over from debt-financed consumer spending and bring the world’s 11th-largest economy back to full production over the next two years.

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Easy credit

Easy credit also aided auto sales in the United States, which have recorded the best year since 2006. Analysts at Moody’s Investors Service wrote in a January report that auto loan companies were lowering lending standards in the market. aim to gain market share.
The Justice Department has subpoenaed finance units, including GM and Santander Consumer USA, for documents related to debts taken out and securitized through their subprime auto loan businesses.

Last month’s newspaper ads feature eight-year loan offers for select Hyundai Motor Co. Elantra models and seven-year terms on certain General Motors Co. Buicks, which DesRosiers said were about twice as long. than typical loans ten years ago. Manufacturers and lenders are reaching out to consumers like Collins who want low interest rates and longer repayment terms that lower their payments.

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Stretch Payments

Collins said she bought her car three weeks ago with funding of around $ 30,000. “I wanted to lengthen it,” she said of her loan, as it meant “my payments were smaller”. When asked if she was concerned about the added risk of adding a year to her loan, she said using the accelerated payments option could end up improving her credit score. “It gives my credit a good impression. “

Scott Hannah’s colleagues see people having trouble with easy loans every day. The president of the Credit Counseling Society, a nonprofit consumer service, says that 10-15% of the 30,000 people his business meets each year receive counseling because of auto loans.

While extending the term of a zero interest loan does not increase the total cost of borrowing, it delays when the value of the vehicle exceeds the debt. Hannah also said that long-term loans can get people into more debt than they can afford.

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Five years

Hannah recommends that consumers stick to a maximum term of five years and a 20% down payment on their auto loans. “If you can’t deposit 20% including tax, you’re not ready to buy a car,” he said. “It is not in the consumer’s best interest to take out a longer term loan for an asset that is depreciating. “

There is little evidence to date that Canadians struggle to keep up with their auto loans, with first-quarter default rates of 0.76% over 60 days and 0.61% over 90 days, both close record lows, according to Equifax Canada.

“We don’t see any obvious red flags,” Regina Malina, senior manager of Equifax in Toronto, said in a telephone interview. “That we can relax and say it’s okay, I would say it’s too early to wrap up. “

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Gerry Cloutier, general manager of Myers Hyundai in Ottawa, covered the dealership with posters announcing 96-month zero-interest loans.

Price, Payment

“People don’t buy the price, they buy a payment,” said Cloutier, 59. Today’s buyer wants monthly payments of around C $ 200, a goal made possible by longer loan terms and lower borrowing costs, he said. Higher interest rates could slow the market or cause some customers to buy a smaller or cheaper car.

There are even possibilities for loans beyond eight years in a context of strong consumer demand and competition in the sector. “At some point, a manufacturer will come up with a longer term,” Cloutier said.

Bloomberg.com

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