Flaherty eyeing vehicle loans
Multi-year term finance trend has minister worried
Finance Minister Jim Flaherty, who has repeatedly warned consumers about compiling too much household debt, has been closely monitoring the huge growth in popularity of long-term vehicle financing in Canada, show federal documents.
Briefing notes prepared for Flaherty by Finance Canada officials, and obtained by Postmedia News under access to information legislation, show the department and minister have been keeping a close eye on a trend that has more and more Canadians obtaining vehicle loans of six years or longer in an effort to reduce their monthly payments.
Many consumers, already strapped with large monthly mortgage payments, are looking for some extra financial breathing room and taking out car loans for as long as eight years (96 months).
According to J.D. Power & Associates, 63 per cent of car buyers in 2013 who borrow to finance their new vehicle purchases are taking out loans of six years or longer — a huge increase from just 14 per cent six years ago.
“From the consumer standpoint, I think a lot of this has to do with managing the monthly cash flow,” explained Brian Murphy, senior manager with J.D. Power & Associates.
“Time will only tell how this works for consumers. Most consumers, if they’re financing a car today over 84 months, they’ve probably never done that before. It’s somewhat unchartered territory.”
Overall, the share of new vehicle sales by cash and lease has declined over the last five or six years as the share of those through financing has increased.
So far in 2013, approximately 62 per cent of all new-vehicle sales have been through financing, with 20 per cent by lease and 18 per cent by cash, according to data from J.D. Power & Associates.
In 2008, 46 per cent of sales were through financing, with 33 per cent by lease and 22 per cent cash, according to the data, which is voluntarily provided by more than 700 Canadian auto retailers.
The move to longer financing terms was partly born out of necessity, said Murphy. The longer financing terms essentially allow Canadian car buyers to have a similar, lower monthly payment to when they leased a vehicle, he said, although they would now own the vehicle at the end of the term.
Flaherty criticized some Canadian lenders earlier this year that were offering hugely discounted mortgage rates to attract business, worried about a potential housing crash and consumers holding unmanageable debt levels once interest rates go up. But the finance minister did not seem as concerned about lending for automobiles. Whereas the federal government has a hand in insuring mortgages through the Canada Mortgage and Housing Corporation, it doesn’t have any such role for auto lending.
The briefing notes provided to Flaherty last fall highlighted some of the numbers calculated by J.D. Power & Associates.
Finance officials also delivered a couple of preliminary conclusions, including “there has been a clear shift in auto financing,” and that vehicle loans with longer amortization periods have attracted customers who once leased vehicles and are looking for lower monthly payments.
There is no indication from the documents what actions the government may take. Large parts of the briefing notes are blacked out, including a section titled “next steps.”