– Graphic source: J.D. Power & Associates’ Power Information Network
More than half of Canadian car buyers who opt to finance take a loan of 84 months or longer, which suggests “we might be bumping up against a ceiling regarding the (term) length,” says the chief economist of the Canadian Automobile Dealers Association (CADA).
But loans stretching to seven or eight years are not a ticking time bomb in the marketplace, adds Michael Hatch.
“We’re aware of that trend towards ever-longer amortization,” says Hatch. “I don’t think it can get a lot higher.”
Nonetheless, loan delinquency rates at about 1.2-1.3 per cent are the lowest of any non-mortgage debt in Canada, says Hatch.
Still, J.D. Power and Associates’ PIN (Power Information Network) data shows that 54 per cent of financed purchases have terms of 84 months or longer, up from 52 months late last year.
Auto analyst Dennis DesRosiers of DesRosiers Automotive Consultants points out that the trend to longer loan amortization follows an increase in the length of vehicle ownership. Canadians now hold onto a new vehicle for eight to nine years, he says.
“If own a vehicle for eight to nine years, why not finance it for eight to nine years?” he says.
But in a new report, Merrill Lynch economist Carlos Capistran argues that Canadians as a whole are being buried under excessive debt and the Bank of Canada should signal rate hikes immediately. Capistran argues that Canada has an overheating credit market marked by excessive risk-taking, and it should be cooled down by the Bank of Canada.
This is not a new concern. In its year-end Financial System Review, the Bank of Canada revisited its oft-expressed concern about high levels of consumer debt in Canada.
“Since June (2016), the proportion of highly indebted households has continued to rise in many cities, notably in the Greater Toronto Area,” the Bank said in a statement. Statistics Canada says Canadian household debt is at a record high, with households holding $1.68 of credit market debt to each dollar of disposable income.
Hatch and DesRosiers have argued that vehicle debt is not a pressing concern. There is good debt and bad debt, and “housing and cars tend to be good debt” with an underlying asset, says DesRosiers.
“A car is very much a need item, not a want item,” says DesRosiers. “It’s not a trip or goodies in your garage.”
DesRosiers also dismisses concerns about the nearly one-third of Canadians who are upside down– with loan balances exceeding vehicle value — on their trade-in, according to PIN data.“Everyone has always been upside down; that’s nothing new. It’s the nature of our industry” to have a large number of trade-ins worth less than the outstanding loan,” says DesRosiers.
Hatch argues that longer loan terms are a response to consumers demanding affordable monthly payments which are now approaching an average of $610, notes J.D. Power. Dealers are providing financing answers to a “consumer psychology that focuses almost exclusively on the monthly payment, not the sticker price.”
Hatch and DesRosiers argue that while vehicle loans are backed by a depreciating asset, today’s vehicles are the most durable ever – with an average useful life of more than 300,000 km or 15 years.
“We now have the longest (vehicle) life span in the history of the industry,” says Hatch. “Vehicles are lasting longer and resale and residual values are higher than they used to be.”
So for a number of good reasons, Canadian dealers are not fretting over long loan terms, though they “are increasingly aware of this issue. And more and more are starting to come to the position that this is not the best thing.”
Why? One reason is that consumers who are upside down have a more difficult time buying a new vehicle.
“It takes forever to get into positive equity on the vehicle. And that hammers their ability to trade in for the next one,” he says.