45% of used-vehicle loan terms 'frighteningly' long at 84 months, up from 25% in 2021

Rising interest rates and high prices are pushing more used-vehicle buyers into “frighteningly” lengthy loans, stretching consumer budgets while creating both opportunities and risks for Canadian automobile dealers.

Used-vehicle loans with financing terms of 84 months now account for about 45 per cent of the used-vehicle market, up from 38 per cent last year and 25 per cent in 2021, said Robert Karwel, senior manager of J.D. Power’s Canadian automotive practice.

“You only increase your amortization for one reason: It’s to maintain a lower monthly payment to maintain the family budget,” Karwel said.

J.D. Power collects used-vehicle data from franchised dealers and a number of used-vehicle centres, Karwel said. That means the sample skews to the “newer and nicer” side of the used-vehicle market, with most vehicles up to eight years old.

But longer loans are becoming more common across the entire segment.

Buyers with poor credit or no credit are also increasingly opting for a “term stretch” to 84 months to keep their monthly payments within reach, said Andrew Abraham, CEO of the Ottawa-based subprime lender OCM Auto Financing Group Ltd.

“They need a vehicle. It’s a way to get their kids to soccer practice, the way to get to work,” Abraham said. “As people get outside the city limits, they need their vehicles because public transportation isn’t available.”

2021 A SORE SPOT FOR PRICES

Used-vehicle loan terms have been trending longer for some time, but the momentum accelerated in 2021 as used-vehicle prices spiked, said Daniel Ross, senior manager of industry insights and residual-value strategy at Canadian Black Book.

The price of the average used vehicle topped out at between $38,000 and $39,000 last year and has since dipped to about $36,000, Ross said.

“We’re seeing things come down a little bit, but we’re still far and above even where we were in 2021.”

With high vehicle values and high interest rates compromising affordability, buyers — particularly entry-level ones — have been forced to extend borrowing time frames, Ross said.

“Consumers are looking to stay in a consistent monthly payment range to what they were used to previously, so the only thing that they have is to elongate that loan term,” he said.

Ross, Karwel and Abraham see little relief in sight for buyers as both new- and used-vehicle inventories remain tight.

UPSIDE: MORE F&I SALES

For dealers, however, the longer loan timelines are creating opportunities.

Finance and insurance products, once pitched when selling new-vehicle sales, are increasingly common on the used side, Ross said.

“As much as you’d previously have said, ‘No, I’m not interested in that kind of stuff,’ now you have to stop and ... think about it because now you’re going to be owning that vehicle for so many more years,” he said.

Higher used-vehicle prices are also pushing customers into cars that are a few years older and thus already or nearly out of warranty, Karwel said. Coupled with the longer loan parameters, this allows dealers to sell service contracts “left, right and centre.”

“It’s not surprising that consumers are also buying more and more surety products to make sure that they don’t face an expensive out-of-pocket repair, based off the fact that their used car was more expensive than ever, and they took a longer term to finance it than ever,” he said.

FEWER REPEAT BUYERS

Though dealers are making more money on F&I, there is a downside to the current environment, Karwel said.

If a customer puts the minimum down on a used vehicle and takes as much as seven years to pay it off, it will take a long time for that buyer to become a repeat customer.

Dealers will connect with customers on the service side, but long-term financing puts buyers on the sidelines for years, as opposed to in the market for a new vehicle, said Ross of Canadian Black Book.

“You’re not going to see that customer all that often, so that’s not as big a profit centre,” he said. “Now you’re going to have to look at conquesting more customers.”

The longer terms could also affect vehicle supply.

Used-vehicle prices are already high by historical standards, Ross said. But with longer loan terms, those vehicles will be coming back on the market less frequently, hollowing out inventory and potentially driving prices up further.

The booming sales of service contracts and other surety products indicate that consumers are already “digging in” with the vehicle they have, Karwel said. Facing high prices, high interest rates and the challenge of simply finding a vehicle over the past 21⁄2 years, Canadians, he said, are increasingly planning to “keep this ride for as long as humanly possible.”