Canadians taking on more auto debt over longer terms
Car sales at record levels, but so is consumer debt, including debt from auto loans
For the auto industry, 2013 was a year of record sales, but for consumers, those sales are leading to increasing personal debt.
Easy financing and interest rates of zero or one per cent have encouraged car buyers to accept financing and they’re increasingly choosing longer terms when they buy cars.
Canadian new auto sales rose four per cent last year to 1.74 million cars and most of those buyers received financing, says Michael Hatch, an economist with the Canadian Automotive Dealers Association.
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“Ninety per cent of new car buyers have to finance as part of the purchase – that’s just a reality,” he said in an interview with CBC’s The Lang & O’Leary Exchange.
“It’s a big ticket purchase, we’re talking about transactions that average $20,000-$25,000 in value. Most people don’t walk into a dealership with a sack full of cash to purchase these things, they have to finance at least a part of it.
Hatch said it’s been a buyer’s market for cars, with many players competing for consumer attention, with incentives and attractive financing.
The biggest factor driving record car sales last year was affordability, he said.
“Basically average new car prices are at historic lows – they’ve defied inflationary pressures over the past decade, decade and a half, and when you combine that with the product that’s out there it’s an extraordinary market for consumers and they’re responding to that,” Hatch said.
At the same time non-mortgage debt is at record levels – up one per cent to $27,743 in 2013, according to credit bureau TransUnion. It predicts debt could rise by four per cent in 2014..
The single biggest driver of increased personal debt in the past decade has been automotive-related lending, Hatch said, adding that even car buyers with cash are tempted to put less down, because financing is so cheap.
J.D. Power estimates that 58 per cent of car buyers opt for terms of six years or longer, much more than the three or four years that used to be the industry standard.
“A lot of the financing comes from the manufacturers and the trend has been to longer terms,” Hatch said. “Consumers faced with a choice between $400 a month for 36 months or $200 a month for 72 months are going to go with the latter.”
But he argues that even if interest rates rise in 2014, cars are so affordable that consumers will not be deterred.
“The default rates on those loans are at historic lows, so I don’t see it as a problem,” he said.
Hatch said pent up demand for new cars caused by consumers postponing buying during the recession is over, but there is still robust demand for vehicles and a chance for a new sales record in 2014.