Banks making ‘riskier’ car loans to Canadian consumers: report

Repayment terms on car loans have been extended over longer and longer time horizons in recent years, helping buyers keep monthly payments lower on more expensive vehicles. THE CANADIAN PRESS/AP, Stefan Rousseau

If it seems like every other vehicle on the road is either a luxury sedan, plush crossover or high-end truck, your eyes aren’t fooling you.

Canadians have “shifted preferences,” according to a new report, toward more expensive rides, enabled by lenders who have aggressively stepped up loan activity in auto financing in recent years, led by some of the country’s big banks.

Ultra-low borrowing rates coupled with “riskier” lending practices that have stretched out repayment periods to as long as eight years are allowing many car buyers to finance their way into higher-end vehicles.

“Low monthly payments facilitated by low interest rates and longer amortization periods are encouraging consumers to purchase more expensive vehicles,” a Moody’s Investor Services report said on Thursday.

But as auto sales hit record highs again this year – eclipsing last year’s record boom – debts on bigger and longer-term loans are piling up.

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Led by banks like TD, RBC and Scotiabank who have piled into car financing since the end of the recession, Moody’s says overall debt from car loans has surged 20 per cent annually, an even faster rate than the growth in home loans.

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MORE: Rise of the 8-year car loan

Loans on passenger vehicles topped $64-billion at the end of 2013,  up from $16.2 billion in 2007, according to Moody’s.

‘More car’

Loans with payback time frames longer than five years (60 months) have jumped sharply within some of the banks, the report said, noting the amount of 60-month loans or longer at TD now makes up a third of all auto loans on its books.

Moreover, financing terms of 84 and even 96 months are being increasingly offered to consumers, according to experts.

As term loans have been lengthened to lower payments, consumers are buying “more car” for the same payment they would be making on a shorter term period for a less costly vehicle, Moody’s analyst Jason Mercer said.

More debt

The problem, Moody’s found, is the trend prolongs the borrower’s debt burden, and worse, risks putting some on a “debt treadmill.” Mercer noted evidence of some lenders packaging loans left over on older vehicles into new and bigger loans – on new and likely even more expensive vehicles.

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The cycle that’s developing among some Canadians spells bad news for both the borrower and the bank, Moody’s said.

“The treadmill can only end in one of two ways,” Mercer said. Either the consumer maintains the discipline to pay off the lengthy loan, or they default – risking personal bankruptcy as well as a loss for the lender.

The report criticizes the new lending practices as being “riskier” than historical norms, saying it is an “evident demonstration” of loosening lending standards.

Indeed, Canadians have borrowed record amounts in recent years, posing an ever increasing concern to economy watchers and policy makers who fret that another downturn or recession could be severely worsened by consumers’ inability to pay down their towering debt loads should they suffer a shock such as losing their job.

MORE: Bank of Canada worries over ‘hot housing market’

Low borrowing rates have made payments manageable for car buyers and home owners alike in recent years, while Canada’s economy and job market, while not exactly roaring, appear stable.

Many on the roads should hope it stays that way.

“Auto loan performance could take a sharp turn for the worse in an adverse economic scenario,” the Moody’s report said.

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