TORONTO — Loans with terms of 84 months or longer made up more than 50 per cent of all automotive financing in Canada in the first half of 2019, according to J.D. Power. While this number is consistent with previous years, 96-month loans are on the rise.
It’s a trend that allows car buyers to bring monthly payments down and helps dealers keep F&I profits in-house, but can raise the risk of defaults in the event customers can no longer keep up with payments.
Mitigating that risk is prompting dealers to offer insurance products that allow consumers to literally walk away from car payments in the event they can no longer support them, said David Hertzog of BDO Canada, an accounting, tax and advisory firm for a variety of sectors.
“Walkaway insurance would be the one that would cover off [buyers] if there’s negative equity on the vehicle. “If you’re upside-down on your loan — let’s say you’ve got to get out after four years, you lose your job or you’re sick and you can’t make the payments — walkaway insurance will cover you off, depending on what coverage you get,” said Hertzog, who works with dealers in the Greater Toronto Area.
“F&I departments in dealerships are being urged to sell this policy because it protects the customer, but it’s obviously a revenue-generating product for the dealer.”
Long-term financing is getting longer. According to Robert Karwel, senior manager of J.D. Power’s automotive practice in Canada, 96-month terms have made up 14 per cent of financing so far in 2019; that compares with 12.1 per cent last year, 12.7 per cent in 2017 and 10.1 per cent in 2016.
The volume of long-term financing had dipped from 2017, when 55 per cent of loans were for terms of 84 months or longer. For 2019, the month with the greatest percentage of long-term-financing products sold was February at 57.5 per cent, followed by March at 53.8 per cent.
Estimated figures for June are slightly lower at 52 per cent, according to J.D. Power.
Karwel said there are several factors driving 96-month loans.
“We’ve noticed most of the pullback has been out of finance and leasing incentives. This means that transaction price starts to rise, which means generally that payments start to rise, and you start to hit affordability concerns.
“Consumers might be getting stretched thinner and thinner, and hence the desire for longer terms starts to drive upward.”
FEAR OF FEDS
If an economic downturn causes an increased rate of defaults on longer-term loans, the situation could one day invite government intervention, said BDO’s Hertzog.
Insolvencies among consumers rose in May to 12,375, up five per cent from April and 8.6 per cent from May 2018, according to the latest figures from the Office of the Superintendent of Bankruptcy.
“What happens in three or four years if they lose their job or they can’t make the payments?” he said. “That car is going to be repossessed, and they’re going to be in trouble.
“It’s a little bit like what happened in the [United] States with the mortgage prices, where the banks were letting people buy houses with little to no equity.
“Maybe the government steps in and says you can’t give a financing arrangement to a customer with a $50,000 car when they’re making dollars of income a year. Maybe they’ll have some sort of a rule in place that you’ve got to have 10 to 15 per cent equity on a lease or finance.”