When it comes to buying a car, Canadians can’t get enough of the zero percent loan, no down payment and cash back options offered by their car dealerships.
About two-thirds of Canadians sought dealer financing when purchasing their last new or used vehicle, according to analytics software organization FICO, compared to an overall average of 49% per 2,000 consumers in nine countries surveyed earlier this year.
The figures show an incredible level of confidence, with 58% of Canadians planning to use dealer financing for their next purchase and 70% considering only one lender before making a decision, the highest level among the nine countries.
One-stop shopping convenience and the expectation of promotions and discounts are driving the trend, experts say, adding that there is nothing wrong with that, as long as consumers are aware of their options and choose the one that best suits their situation.
“Consumers are very savvy,” said Denis Ducharme, president of the Motor Dealers’ Association of Alberta.
“They do a lot of shopping and if there’s too much of a difference it could cost you, so it needs to be set up as an option that a consumer might want.”
Financing has become an important part of the dealer sales process, such as winter tire sets and extended warranties, both for its ability to attract buyers and more directly from fees earned through agreements with dealers. banks and other lenders, Ducharme said.
Consumers can choose from manufacturer incentives such as low-interest or zero-interest loans, sign agreements to access credit from major banks, or choose to take cash back for cash sales.
Leasing works much the same way, with the consumer essentially buying the vehicle for a specific period and then returning it or deciding to pay for the rest of the car’s life, he said.
On the other hand, car buyers who decide to obtain a loan through their bank have the advantage of dealing with the same organization that issued their mortgage and credit cards and that could manage their retirement funds,” said Brad Robertson, senior financial planner at CIBC. Investor services.
“What I would tell a client is to look at all the options and see how they relate to their overall financial plan,” he said.
He suggests borrowers get pre-approved for a loan to ensure they have a realistic view of what they can afford before they go shopping.
Interest rates and monthly payment levels are important, and the bank will help the customer decide whether to go variable or lock in if rates go up, Robertson added.
A potentially concerning trend is toward longer finance and lease terms, said Robert Karwel, a senior executive with JD Power’s Power Information Network, which analyzes vehicle transaction data from 3,000 vehicle franchises in Canada.
About half of all new vehicle financings in 2018 were for terms of 84 months or longer and about 35% of leases were for terms of 60 months, he said.
“These two financial instruments, the 84 or 96 month loan or the 60 month lease, are designed to do one thing,” he said.
“It’s about getting your payment down to a manageable level. Because in Canada, the price of the car is largely irrelevant, it’s the monthly payment that makes or breaks the deal.
Karwel said zero or near zero percent interest, especially if the term is extended to seven or eight years, allows the customer to pay the payments on an SUV or pickup truck that might otherwise be out of their price range.
The danger arises when the buyer decides or is forced to replace the vehicle before the end of the term of the loan, which could cause him to owe more than it is worth and therefore to take on more debt.
The average financing in Canada is about 108% of the list price, he said, to cover taxes, freight and other fees. Dealers can help arrange an even larger amount to help pay off what’s left over from a previous loan.
With the average price of new vehicles at a record high of $34,000, Karwel said his best advice for buyers is to make sure their down payment is as high as possible. And keep the car until the loan is paid off.
The FICO survey points to an opportunity for banks and other lenders to emulate the sales practices employed by dealerships to make their products more appealing to customers through bundling, incentives and convenience, said Kevin Deveau, vice president. -president of FICO Canada.
“I think the advantage of dealers is that they have you captive,” he said.
“You’re in their showroom and they have some pretty great deals on leases, rates, and monthly payments.”