Automotive News Canada - July 2019 - v2 - 12

* JULY 2019

Long-term financing is getting longer
96-month terms offset a pullback
of automaker incentives, but there's
increased risk for consumers

By STEPHANIE WALLCRAFT
TORONTO CORRESPONDENT

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

AUTOMOTIVE NEWS CANADA

JULY F&I SPOTLIGHT

months or longer. For 2019, the
negative equity on the vehicle.
month with the greatest per"If you're upside-down on
centage of long-term-financing
your loan - let's say you've
products sold was February
got to get out after four years,
at 57.5 per cent, followed by
you lose your job or
March at 53.8 per cent.
you're sick and you
Estimated figures
can't make the payfor June are slightly
ments - walkaway
lower at 52 per cent,
insurance will cover
according to J.D.
you off, depending on
Power.
what coverage you
Karwel said there
get," said Hertzog,
are several factors
who works with dealdriving 96-month
Robert
ers in the Greater
loans.
Karwel:
Toronto Area.
"We've noticed
Growth in
"F&I departments
most of the pullback
96-month
in dealerships are
has been out of finance
being urged to sell this loans is
and leasing incentives.
being fueled
policy because it proThis means that transtects the customer, but by a drop in
action price starts to
automaker
it's obviously a reverise, which means genincentives
nue-generating proderally that payments
that is raising
uct for the dealer."
start to rise, and you
transaction
Long-term financstart to hit affordabiliprices.
ing is getting longer.
ty concerns.
FILE PHOTO
According to Robert
"Consumers might
Karwel, senior manager of J.D. be getting stretched thinner
Power's automotive practice in and thinner, and hence the
Canada, 96-month terms have
desire for longer terms starts
made up 14 per cent of financto drive upward."
ing so far in 2019; that comFEAR OF FEDS
pares with 12.1 per cent last
year, 12.7 per cent in 2017 and
If an economic downturn
10.1 per cent in 2016.
causes an increased rate of
The volume of long-term
defaults on longer-term loans,
financing had dipped from
the situation could one day
2017, when 55 per cent of
invite government intervenloans were for terms of 84
tion, said BDO's Hertzog.

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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 mak-

David Hertzog: The federal
government might intervene
if the slowing economy
increases the rate of defaults
on longer-term loans.
PHOTO SUPPLIED
B Y D AV I D H E R T Z O G

ing X 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."
- ANC

OMVIC: Retailers need
to outline the perils of
long terms to customers
PROVINCIAL CONSUMER-PROTECTION LAWS
compel dealers to ensure car buyers understand the risks
associated with long-term loans.
The Ontario Motor Vehicle Industry Council (OMVIC)
maintains guidelines regarding ethically communicating
to consumers the risks of long-term
financing.
"OMVIC has advised dealers that
before recommending seven, eight
or nine-year loans, a conversation
should take place with customers to
determine what financial product
best meets their needs," said spokeswoman Farah Mohammed.
OMVIC advises interacting with
consumers on the following points:
* Does a customer usually trade in OMVIC
spokeswoman
a vehicle before paying it off?
* Will the vehicle reliably last the Farah Mohammed
said if buyers are
term of the loan based on the cusnot adequately
tomer's driving habits?
informed about
* What is the overall cost of the
the specifics of
loan after factoring in the longer bor- their financing,
rowing term?
dealers could
* Does the consumer underfind themselves
stand that if the vehicle is stolen
charged by the
or destroyed, his or her insurance
province.
company will reimburse the vehiPHOTO SUPPLIED BY
cle's value, not what is owed on the FA R A H M O H A M M E D
purchase loan?
Failure to disclose the negative-equity risks associated
with long-term financing could expose dealers to provincial Consumer Protection Act charges. In Ontario, while
there is not yet precedent for such a charge, Mohammed
said dealers should familiarize themselves with the regulations that govern unconscionable representation to
avoid potential charges and penalties.
Similar risk factors exist in B.C., said Michelle
Harrison, director of operations for the Vehicle Sales
Authority [VSA] of British Columbia.
"If the right factual circumstances under the Business
Practices and Consumer Protection Act exist, the VSA
could investigate and potentially administer penalties for
an unconscionable act," Harrison said. "Placing a consumer in a financing arrangement that has a negative-equity component is not in and of itself the unconscionable
act.
"The financial disclosures required by the Disclosure of
the Cost of Consumer Credit provisions of that legislation
require advising a consumer of the financial impact of a
credit transaction before they enter into the transaction."
- Stephanie Wallcraft

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Automotive News Canada - July 2019 - v2

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