IT PAYS TO RESEARCH
Most Canadians don't bother to do their homework on their vehicle-financing options
People like to complain about cars. For some, it's just a pastime. For others, it's a calling.
For many, it's an awful experience they had at a dealership. Others complain that automakers are gouging them with exorbitant pricing. We decry the lack of transparency in auto financing, the dishonesty of used-car salespeople, and positively rejoice in our new-found ability to put the screws to dealers with invoice pricing. But here's the problem: The real reason so many Canadians get screwed is because they are wilfully ignorant.
Buried deep in Deloitte's recent 2021 Global Automotive Consumer Study is the news that 35 per cent of Canadians do not research their auto financing at all. In fact, three times as many Canadians didn't do any research into their financial options as those who spent three to five hours learning the difference between effective and advertised interest rates.
We are fond of the quote that cars are the second-biggest purchase most consumers are likely to make. But, as dealer principal of Goderich Toyota Pat Barnes noted during a Driving into the Future panel on Driving.ca, considering how much more often we buy cars — and that the average transaction price for a new car or truck these days is more than $40,000 — the total we'll spend on vehicles during our lifetime can rival the cost of a new home. This makes the news that 55 per cent of Canadian consumers spend less than an hour trying to figure out how they can lower their financing costs absolutely stupefying.
It also explains why too many Canadians confuse low monthly payments with actual affordability. There's a reason so many car loans are in negative equity — once-new SUVS are depreciating faster than consumers are paying them off. And it takes a truly complete lack of fiscal acumen to think that the solution to not being able to afford a luxury car or SUV is to stretch out the payments to 96 months.
This is a major problem in Canada right now. J.D. Power recently noted the most popular car loan in Canada is now seven years.
Judging from Deloitte's study, this lack of financial acumen will continue to affect our expectations of automakers. For instance, about 20 per cent of all Canadians — and one-third of all 18-to34-year-olds — are interested in a car “subscription” that allows you to switch vehicles within an automaker's lineup. Think of it as a super-lease. But an incredible 50 per cent of Canadians wouldn't want to pay more than a single car lease for this experience.
In fact, 14 per cent think they should pay less for the right to switch cars at a dealership. And yet fewer than one in 10 would be willing to pay 20 per cent or more for the right to swap cars, which is closer to the realistic pricing.
It's not that Canadians don't read the fine print. Deep in the same study is the fact fewer than 24 per cent of consumers in India think they'll pay the same or less for a subscription mobility service, and 35 per cent know they'll have to pay 20 per cent or more.
The numbers from China mirror a similarly realistic understanding that swapping out different cars will have a cost associated with it.
In another striking difference, unlike Canadians, who are obsessed with interest rates and low monthly payments, Chinese and Indian consumers say the most important auto financial consideration is the flexibility for early termination of a loan.
I think we know which of those two options make the most sense. If you're looking for the reason for our seeming silliness, look no further than information. Remember that statistic that started this rant? That 35 per cent of Canadians don't research their auto financing options at all? Well, only eight per cent of Chinese consumers don't look into financial alternatives before buying. Indians are even better educated, with only six per cent claiming they don't do any research. In fact, a whopping 56 per cent spend more than three hours delving into their options, twice as many as we Canadians.
Despite the pandemic, Canadians remain wedded to the concept of easy money and aren't much concerned with finding cheaper alternatives. Consumers in India and China, on the other hand seem to be emulating our post-depression-era parents in counting every penny before it is spent.
Companies such as Genesis are committed to making the process of buying an automobile transparent by guaranteeing no-haggle pricing. Others, such as Cadillac, are looking to make your life so convenient that you can visit its live “showroom” while sitting on your couch. And at least some dealers, including Barnes, welcome — actually prefer — educated customers. With a minimum of effort, it's relatively easy to figure out the effective — or “real” — interest rate you're paying for that “bargain” new-car financing.
So, before you start blaming the dealer or automaker because you think you got screwed on your last deal, you might try looking in the mirror for the real culprit. In finance, as in law, ignorance excuses no one.