Automotive News Canada - July 2016 - 24

* J U LY 2 0 1 6

Turning negative equity
into a positive situation
"I want a customer I can
sell cars to for years,
not just make a sale today
or tomorrow."

The big picture of long-term financing

By MICHAEL GOETZ
TORONTO CORRESPONDENT

LONG-TERM FINANCING AND ITS
focus on small monthly payments can
be troublesome for many consumers and dealers, cautioned a recent
Financial Consumer
Agency of Canada
(FCCA) report.
This wasn't news
to car dealers.
Long-term
financing has been
rising steadily in
Canada since 2010.
The problems it
can create - including negative equity trade-ins when consumers want or
need to change vehicles before they
build any equity in those 72-, 84- or
96-month loans - have to be confronted in some manner every business day
at dealerships across the country.
Roughly 30 per cent of all trade-ins
now have some negative equity.
Typically, it gets rolled into another long-term loan, and no surprise how
that story plays out: deals get harder to
make, and when they do come together, consumers wind up taking on more
debt. When it comes to negative equity, nobody's a fan. But outside of more
leasing, the only ways to turn around
the negative-equity ship appear to be
small adjustments in dealer processes,
and more consumer awareness.

THE LONG-TERM STRESS-OUT
Dealers have to be mindful of who
they offer these long-term loans to,
says Paul Goodman, a sales manager
at Nurse Chevrolet Cadillac, in Whitby,
Ont. He said young people aren't particularly good candidates as their circumstances will be the most volatile
over the ensuing five to 10 years.
Also, anyone in an already precarious financial situation will not likely
be able to cover the short fall if they
need to get out of the loan early, and/or
pay repairs and maintenance on top of
loan payments later in the term.
"I can get almost anybody
approved," said Goodman, "but sometimes we have to say, 'you need to see
us next year, when you're in a better
position' ... I want a customer I can sell
cars to for years, not just make a sale
today or tomorrow."
Those who drive more than average,
or don't maintain their vehicles particularly well are also potentially not
great candidates for long-term financing.
Raymond O'Kane, managing director and head of national dealership
finance for the Bank of Montreal, has
advocated numerous times for shorter-term finance deals for some customers, noting that many clients in longterm loans have the financial capacity
to be in 48- or 60-month terms instead.
After dealers have made the sale at
72, 84 or 96 months, dealers have nothing to lose, he says, by offering the customers one final chance to shorten the
term so they save interest and build
equity faster.

CONSIDER DEBT, NOT JUST PAYMENT
"My hope is that consumers will
consider the impacts of the extended
car loans before they go into them,"

Few buyers see
depreciation as
the major vehicle
cost: survey

Many think it's the payment or
maintenance, but depreciation
averages more than $40 a day
during the first year of ownership
By STEVE MERTL
VA N C O U V E R C O R R E S P O N D E N T

CANADIANS ARE INCREASINGLY
turning to online sources for information on
what their trade-in is worth before negotiating
to buy another vehicle, according to a survey
commissioned by Canadian Black Book (CBB).
Yet while buyers are increasingly well
informed about the vehicles they research,
few realize the extent that depreciation has on
their new vehicle purchase, and on the value
of their trade-in vehicles.
Less than one percent of buyers surveyed
recently were aware that depreciation is the
biggest source of cost to vehicle ownership.

CALCULATE THIS

SOURCE: JD POWER

said FCCA Commissioner Lucie
Tedesco in an interview.
The agency's mandate is to identify
issues that impact consumers, via the
institutions that the agency regulates.
After the 2008 financial crisis, federally rated financial institutions acquired
a more prominent share of Canada's
growing auto-finance market.
"So we naturally wanted to better
understand that market, and particularly the risks associated with longterm car loans for consumers," said
Tedesco. Consequently, the FCAA
released its report, Auto Finance:
Market Trends.
In addition to arming consumers
with better information about longterm financing, the report also stated
it will "focus its supervision efforts on
indirect auto loans offered by federally
regulated banks to improve the disclosure to consumers."
The report noted that the initial
amount of negative equity rolled over
by consumers is typically disclosed in
the dealer's bill of sale and the conditional sales contract, but their exposure to negative equity over the life
of their auto loan is not disclosed on
any subsequent documentation they
receive.
"Even though they (banks) go
through third parties, we expect them
to meet the disclosure requirements,"
said Tedesco.

KEEPING THE VEHICLE THE FULL TERM
If customers keep their vehicles for
the entire loan term, negative equity
never becomes a factor. And customers can stay in their vehicles for eight
years and longer, because vehicles now
last at least that long.
"Some customers choose to finance
a vehicle over its useful life ... which
makes sense to me," says Steven
Chipman, president and CEO of

Winnipeg-based Birchwood Automotive
Group.
CADA's Hatch also points to the low
default rate among auto loans in general, suggesting that most Canadians
don't get caught out by long-term
loans.
But the FCCA points to a sudden
uptick in defaults among long-term
loan holders, particularly in Western
Canada, which is in the throes of an
economic downturn.

NEGATIVE EQUITY
AMOUNTS STABILIZE
According to Robert Karwel, senior
manager of JD Power's Canadian
Automotive Practice, the amount and
percentage of negative equity in tradeins has more or less stabilized over the
last year. He contributes some of that
to the "self limiting" nature of loans that
incorporate debt from a previous loan.
"You can easily do it once, and
probably a second time, but by the third
successive loan you probably won't be
able to get credit anymore."
The greater availability of leasing
also gives consumers another "low
monthly payment" option.
Karwel also notes that OEMs
that "pull ahead" incentive programs
designed to get consumers out of other
current vehicles and into new models
they need to move, will also continue to
create the conditions that can result in
negative equity trade-ins.
And consider it's also spread to
used vehicle financing: While 60
months is the still the dominant term
there, Karwell says the fastest growing
term is 84 months.

Online value calculators such as CBB still
don't rank highly with consumers researching their next purchases. Opinions of friends
and family, press reviews, classified ads and
automakers' build-and-price tools come ahead
of them, the poll conducted by Ipsos Canada
found.
Just seven per cent of respondents used
such calculators for basic research, but the figure jumped to 60 per cent when it came time to
evaluate their trade.
That's reassuring, Brian Murphy, CBB's
vice-president of research and editorial, told
Automotive News Canada. Its free public site
gets about 500,000 visitors a month, 200,000 of
whom look up the value of their vehicles, he
said.
The survey found 22 per cent of respondents had used the CBB calculator.
"There's still a pretty large chunk of the
population, about a third, that think we exclusively cater to dealers, which isn't true anymore and hasn't been true for six years or so,"
Murphy said.

LEERY ABOUT TRADE-IN PROCESS
CBB monetizes the site through advertising
and subscription fees from dealers who have
exclusive access to other tools.
Canadians are leery about the trade-in process, with 82 per cent of those polled suspecting a lot of information about values is not
shared with consumers.
Some 17 per cent said they had no idea
what their car was worth.
Customers often arrive at dealerships with
an inflated value for their trade, which can
complicate negotiations, Murphy said.
Often, he said, that's where many deals fall
apart.
Both sides benefit if information from a
source such CBB provides realistic valuations,
he said.
The survey also found people have a distorted view of vehicle-ownership costs.
"To be quite honest, we were shocked that
only one per cent of the people that we had
Ipsos speak to were aware that depreciation
was the biggest source of cost to vehicle ownership," said Murphy.
One third said insurance was the biggest
expense, followed by fuel, maintenance and
vehicle payments.
Depreciation is "invisible," Murphy suggested.
"You don't really see it day to day," he said.
"You only see it at the end of the vehicle ownership when you go to trade a vehicle and get
a new one.
"On average across all the 2,200 vehicles
make, model and trim that we track, depreciation for the first year is more than $40 a day."

Automotive News Canada - July 2016

Table of Contents for the Digital Edition of Automotive News Canada - July 2016