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High monthly payments, long loans grease Canada’s auto boom

A row of 2014 Lincoln MKX SUVs are lined up on the lot of a dealership. Many Canadians are electing for bigger crossover makes as payments have been stretched over longer time frames.
A row of 2014 Lincoln MKX SUVs are lined up on the lot of a dealership. Many Canadians are electing for bigger crossover makes as payments have been stretched over longer time frames. AP Photo/Keith Srakocic

There’s another car boom underway in the United States at the moment that’s being generously financed by investor dollars from Wall Street and other financial institutions. Car sales in the U.S. haven’t been this good since 2006, when a credit bubble was helping to inflate the American housing market among other assets.

Nine years later, increasing volumes of funds from big investors who are seeking steady and outsized returns have been funneling into U.S. auto lenders looking to make as many loans as they can.

In Canada, evidence suggests similar forces are fueling a record amount of borrowing in the Canadian new vehicle market, as well.

Longer loans

U.S. lenders have greased the boom by stretching loan terms over longer and longer time frames, thereby attracting buyers with lower monthly payments. The average loan term for a U.S. new car buyer stands at 66 months or 5.5 years, according to Experian Automotive, a researcher. That’s a record length.

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Longer terms and lower monthly payments have allowed U.S. car buyers to step into more expensive rides, as well, with the average amount financed in the U.S. now about $27,799, up 4 per cent year-on-year in the third quarter. The average monthly payment now stands at $470, Experian data shows.

Canadian boom

In Canada, where borrowers have been busy taking on unprecedented amounts of debt in recent years, the boom is even more pronounced with back-to-back years of record new vehicle sales in 2013 and 2014.

According to the most recent data from J.D. Power & Associates, published just a couple of weeks ago, the average Canadian car loan is now 74 months, or more than half a year longer than the U.S. average.

Many car buyers have traded up to bigger and more expensive crossover makes and trucks, as well (which collectively fall into the truck category in the chart below), experts say. That’s helped drive the average value of a car loan up 12.5 per cent since 2010, to $31,450.

The average monthly payment, meanwhile, has edged up 3.5 per cent, to $544.

MORE: MAP — Debt levels rise fastest east of Ontario as jobs, incomes lag

Heightened risk

Experts say such long term loans can present consumers and lenders with heightened risk.

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With a six- or seven-year loan, it takes car-buyers longer to reach the point where they owe less on the car than the vehicle is worth. Having “negative equity” in a car makes it harder to trade or sell the vehicle if the owner can’t make payments.

Here’s how average financing terms have trended since 2010 to the end of last year, courtesy of J.D. Power & Associates.

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jamie.sturgeon@globalnews.ca

 

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