Dealerships push longer-term loans to make cars seem more affordable, but an undercover Marketplace investigation reveals some salespeople are either unable or unwilling to explain to customers how those seemingly sweet deals could load them up with debt down the road.
The industry's regulator in Ontario calls Marketplace's hidden camera footage of sales pitches at 10 Toronto-area dealerships "very troubling."
"This is my worry," says John Carmichael, CEO of the Ontario Motor Vehicle Industry Council (OMVIC). "Consumers who aren't able to either understand or manage that situation and they find themselves in a transaction that's going to come back to haunt them."
A decade ago, four- and five-year loans were the standard in Canada. But the financial crash of 2008-09 took many people out of the new car market. So the automakers teamed up with banks and other lenders to create longer loans to make payments more affordable.
And it worked.
Today, more than half of new car loans are for seven years or longer, according to automotive research firm J.D. Power.
Outstanding car loans from Canada's federally regulated banks alone total $72.7 billion.
"Consumers get hooked," says Mohamed Bouchama, head of Car Help Canada, an automobile buying and advice service. "All they see is low monthly payments. This is the car they want, they have been dreaming to drive … and the dealerships take advantage of that."
'I looked into getting a house and they won't approve me [for a mortgage] because of how much I have on my car, in debt. So you can't basically do anything until it's paid down.' - Chantelle Matthews, 24
Carmichael says longer-term loans shouldn't be pitched as the first and best option.
"You would want [customers] to have a myriad of choices that they can leave with, that will help them to find the best solution for their needs," he says.
But Marketplace's hidden camera footage shows the initial sales pitch at seven of the ten dealerships focused on seven-year loans, despite the fact the customer didn't ask for long-term financing.
Even more troubling was that half of the dealerships encouraged early trade-ins.
One salesperson told the customer, "You're not going to pay anything out of pocket." Another said, "We pay off the loan," and a third, the manager of the dealership, promised: "You're not losing in any way" on an early trade-in.
The reality is the customer can either pay off the remaining debt on a trade-in or add it to the loan for their next car.
After watching the clips, OMVIC's Carmichael said industry rules may have been broken: "They haven't provided honest information to the consumer."
Ontario's Code of Ethics and Motor Vehicle Dealers Act requires that salespeople be "clear" and "truthful." They are to "act with honesty, integrity and fairness" and demonstrate "reasonable knowledge" on the issue of trade-ins.
"I want to go in there and find out what's going on," Carmichael says.
Here's what else you need to know about the potential financial consequences of long-term car loans — information you might not hear at the dealership.
Long-term loans can lead to upsells
Not only are more people paying longer, they're spending more on their vehicles, according to J.D. Power.
The average retail price of a new vehicle sold has increased from $27,566 in 2010 to about $38,000 in September 2017.
"Long-term loans with low monthly payments often encourage customers to buy a more expensive car," says Shari Prymak, a car-buying expert with Car Help Canada.
He warns consumers to negotiate based on the total price, rather than the maximum amount they can afford once or twice a month.
"The last thing you want is to be in a situation where you're making payments on your vehicle ... at the sixth or seventh year and it starts to require costly repairs," he says. "Cars are more complicated now than they have ever been and ... parts can be very costly to replace."
Trade-ins with more debt than value
The financial risk grows for the hundreds of thousands of car owners across Canada every year who trade in their vehicle before paying off the full loan.
The moment a new car leaves the lot, it's worth less than what the owner paid. That "negative equity" continues until about 5.6 years into a seven-year loan because the depreciation happens at a faster rate than payments against the loan.
Marketplace contacted an experienced dealership sales and financing manager who explained that while he wouldn't recommend a long-term loan to a friend, the industry has come to rely on them.
"Sell the car ... we're not going to point out all the negatives, all the potential pitfalls," especially when it comes to negative equity, says the insider, who was granted anonymity because he fears a potential professional backlash.
He says explanations of negative equity are often "sort of cursory" and salespeople avoid going "fully into depth."
Marketplace's hidden camera footage would seem to back up that claim, as only two out of the 10 salespeople volunteered an explanation of how negative equity works and how it's paid off.
Others had to be prompted for clarification, had difficulty with the concept or provided inaccurate information.
OMVIC recently prepared a pamphlet explaining the risks of negative equity and says it will be placed in government service centres. But the regulator won't require that dealerships provide it to customers.
The Canadian Automobile Dealers Association says it's not the industry encouraging longer loans but "consumer psychology" that explains why most customers "focus not on the sticker price of the car ... but on the monthly payment."
With 0 per cent financing, "it is a fully rational choice on the part of the consumer to extend the term of the loan," the association says.
And some of the salespeople filmed at the dealerships Marketplace visited said they offer longer-term loans right off the bat because that's what customers want.
Chantelle Matthews, 24, of Gravenhurst, Ont., is a case study in the dangers of negative equity.
Four years ago, she bought a new Hyundai Elantra on an eight-year loan, but the car had multiple mechanical problems in the first few months.
Matthews says she didn't trust the car and tried to return it to the dealership but was denied. Instead, she says, the dealership told her to trade it in for a new car.
But the trade-in value was substantially less than the outstanding loan since it was so early in the term. The difference was added to the price of a replacement car — another Elantra on a new eight-year loan — resulting in a $50,000 debt.
The young woman was now paying for two cars, one of which she no longer owned.
"Biggest regret?" she says. "Going into debt that much."
To pay off the loan, Matthews says she took on two jobs working 74 hours a week.
"I looked into getting a house and they won't approve me [for a mortgage] because of how much I have on my car, in debt. So you can't basically do anything until it's paid down."
OMVIC says it will look into her case. Its rules require that negative equity be "accurately identified" on contracts in which a previous debt is added to a new purchase also made with a loan.
On her paperwork, the debt appears to be shown as "Additional Retail Value," a line more typically used to describe an upgrade, like better speakers or leather seats.
"This is anything but clear," says Carmichael, after reviewing the contract. "The mathematical gymnastics that appear on this page are astounding to me."
The dealership declined to comment, telling Marketplace: "We will not discuss the customer's situation with anyone other than that customer."
Marketplace's industry insider says the dealership may have believed banks wouldn't approve the second loan because of Matthews's existing debt. So the "additional retail value" tag may have been used to disguise it.
The regulator is following up with Matthews and potentially the dealership.
- If you'd like to share your auto financing story, email Marketplace.