TORONTO — The Ontario Motor Vehicle Industry Council (OMVIC) has started a concerted push to educate and warn consumers of long-term loans and negative equity.
The educational campaign comes after a CBC Marketplace report in November 2017 drew attention to the pitfalls of extended-term car loans
Negative equity occurs when the balance on a car loan is greater than the value of the car.
The average amount of negative equity Canadians carried on new vehicles in the 2017 calendar year stood at $5,930, according to numbers released by J.D. Power on Feb. 2. That’s up 5.1 per cent from the previous year.
The percentage of trade-ins with negative equity was 27.6 in 2017, essentially the same as the 28 per cent in 2016.
Automakers now routinely offer financing terms of 84 months — and sometimes 96 months.
The Marketplace report profiled a consumer who purchased a new car on an eight-year financing plan. The car required multiple repairs within the first year of ownership and became a liability. The consumer then purchased a second car from the same dealership and carried forward $17,000 in negative equity into the second loan, requiring her to work two jobs to make the payments.
This information prompted the show’s producers to send an undercover reporter into 10 dealerships in the Greater Toronto Area to analyze how salespeople explained negative equity to her when she attempted to buy a vehicle. In each case, the reporter presented a budget and a desired vehicle to the salesperson, the combination of which would require a loan of repayment period of more than five years.
Nine of the 10 dealerships featured presented the reporter with a payment plan on a per-payment basis over an extended term and failed to address the consequences of carrying negative equity forward into a future purchase should the car need to be replaced before that time.
NEED FOR EDUCATION
“My worry is always when you extend the contract with that additional debt and the length of time that a lot of these deals seem to be running out now, whether it’s 84 or 96 months, that just compounds the problem where somebody tries to get out of that next transaction early – they’re not happy with the car, their needs change, whatever the problem,” John Carmichael, CEO of OMVIC, told Automotive News Canada. “Our concern is that the consumer understands clearly on the way in that their only avenue is to truly run this [loan] out because they’re buying on a payment basis.”
While OMVIC had already undertaken a consumer education program warning against the personal financial risks that extended-term loans present, the provincial sales regulator has undertaken additional efforts in the wake of the Marketplace report.
“We’ve been advertising in the Toronto Star,” Carmichael said. “We’re in the Toronto Sun coming up. We’re in the Ottawa Sun, On the Go Magazine. We do these advertorials where they are directed purely at consumers to hopefully better inform them.”
Carmichael also believes that dealers can do more to educate consumers at the point of sale and that doing so helps dealers build stronger relationships with their customers.
“We have a promotional piece that we use to inform consumers about negative equity,” he said. “What we also want to see happen is to provide as much information to dealers from our end that will give them to toolbox to demonstrate to consumers what they’re getting into.
“The car business in particular is heavily measured on customer satisfaction. If the effort isn’t taken to ensure that they fully understand the transaction, then we’ve got a problem. The way to protect your brand is ensure that you build a proper customer relationship where they become advocates for you. To do that, it starts with the buying process.”