Lucie Tedesco, Commissioner of the Financial Consumer Agency of Canada, releases new report entitled "Auto Finance: Market Trends"
March 8, 2016
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Good morning everyone and thank you for joining us.
My name is Lucie Tedesco, Commissioner of the Financial Consumer Agency of Canada. Today, the FCAC is releasing its most recent research report entitled Auto Finance: Market Trends. As the head of the Agency, I will provide a summary of the report’s key points and the steps the FCAC will take to help Canadian consumers navigate the automobile finance market.
For most Canadians, automobiles are the second most expensive purchase they will make in their lifetimes. In growing numbers, Canadians are turning to long-term loans to finance their vehicle purchases, extending payments as long as eight or nine years, up from the traditional loan term of five years.
And while Canadians are paying for their vehicles over these extended periods, research shows that they are not keeping them longer. Many continue to trade in their vehicles after only four or five years, when they might owe more on their vehicle than their vehicle is worth. This is commonly referred to as negative equity.
Longer terms and lower, more frequent, payments can create a false sense of affordability that increases consumers’ vulnerability and exposure to financial risks. Numerous consumers are rolling old loans into new loans and, as I call it, entering on to an “auto-debt treadmill.” This could jeopardize their ability to keep up with their overall credit obligations.
After we produced this report, I found the long-term car loan trend in Canada concerning to me. This trend is happening at a time when Canadians are holding a record amount of debt. The Bank of Canada recently noted that household debt in Canada has grown significantly, increasing the vulnerability of the economy and the financial system to adverse shocks to incomes and interest rates. Automobile financing is an important part of this larger picture. In recent years, the growth of auto-loan debt has outpaced all other forms of consumer debt, including mortgages.
In 2015, Canadians drove home 1.9 million new vehicles, setting a record for the third consecutive year. We recognize the importance of the auto sector to the Canadian economy. We also recognize, however, that long-term car loans present certain risks for consumers.
The growing number of consumers who extend their car loan payments over terms of 7, 8 or 9 years not only expose themselves to the risk of negative equity, but they also expose themselves to paying more than they would if they opted for a more traditional loan term. Interest charges are accumulated over a longer term and the loan is paid down more slowly. And if consumers roll their old auto loan debt into their new auto loans, this would also potentially increase the cost of the loan.
Longer term loans with lower monthly payments may seem attractive, but they can also encourage consumers to buy more vehicle than they can afford.
Indeed, sales data show that Canadians are buying bigger and more expensive cars, SUVs and luxury vehicles. By focusing on the size of the monthly payments, consumers may neglect to consider their overall costs. This is similar to the way a 40-year mortgage might encourage a family to buy more house than if the amortization period were only 25 years.
Among the recommendations contained in this report, there are two that I would like to highlight this morning. First, that consumers must determine how much they can afford to pay for a vehicle before they walk into a dealership. Second, that consumers should get multiple quotes from dealers and lenders to get the most competitive rate possible to finance their vehicle purchase. In other words, consumers should spend as much time investigating the type of financing as the type of vehicle that they need.
What FCAC is doing about it
The FCAC recognizes that buying an automobile can be a complex and lengthy process. To assist consumers in making informed decisions, the Agency expects federally regulated financial institutions to disclose, in a clearer and more concise way, the total cost of financing a vehicle in their credit agreements. This is whether they are lending directly to consumers or through intermediaries such as dealers.
The FCAC has also developed new online material to help consumers navigate the complexities of automobile financing. These resources, available on the Agency’s website, walk consumers through considerations such as buying or leasing, overall vehicle cost and the risks of negative equity.
Finally, we will also work with provincial and territorial governments to provide consumers with the information they need to make responsible choices when financing a vehicle purchase.
Outside of the country’s largest urban centres, most Canadians rely on automobiles to get to work and take care of their families. The Agency recognizes that most Canadians will need to borrow money when the time comes to purchase a vehicle. It is essential therefore that consumers have access to a fair and functional auto finance market.
It is also important that consumers understand that while longer terms on vehicle loans may mean lower monthly payments, the same long term may put consumers more at risk during times of unforeseen life events.
We believe that by taking these actions, consumers will be able to better assess the vehicle and financing options that are right for them and for their budget.
I thank you for your attention and would now like to invite Michael Rothe, a representative of the government of Ontario, to say a few words.
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