By Lawrence Papoff
A few auto industry analysts, some automakers and many auto dealers fear that longer auto finance terms will bring a tidal wave of underwater customers and low sales.
Not so, says auto industry analyst Dennis DesRosiers.
“I would challenge that. The average length of ownership in Canada is somewhere in the nine-year range,” DesRosiers told Canadian AutoWorld, “so the four-year return is a myth. It’s overblown because we already have long ownership periods.”
To prove his point, he advises dealers to study their own databases.
“If they did a careful study of their customer base, they would see the ownership periods are a lot longer than they perceive.
“Dealers would like them to buy on a four-year cycle. But most buy on a seven, eight and nine-year cycle.”
But he shares their concern for the underwater customer.
“It’s serious because if you have a consumer that’s underwater, he’s into a product he should not have bought in the first place. There is a need in the industry to make sure consumers buy appropriately.”
He blames what he calls “overselling” by some car dealers. Rather than convincing customers to buy into shorter term financing with money down, they sell long terms and the prospect of driving a more attractive model. The consumer is happy with that, but doesn’t understand the consequences, he says.
“Consumers here chase monthly payments. They know what they want to spend and they say ‘I can afford $350 a month. What can I get?’
“What you want to do is to put the consumer into the shortest loan so they can pay it off in 48 months and they might come back in a year or two and they won’t be underwater.”
He reasons that longer terms leave consumers underwater. But what happens when they need a new car? The temptation is to roll over the debt into the financing of a new car.
“My fear is that if the industry gets too aggressive with this, you are inviting regulators to come in. And more government regulation is the last thing we need.”
There’s no bubble, he reasons, because Canadians keep their cars for nine-plus years. But there are always the cases of the underwater customer. Those cases make the headlines and lead to the government regulations he fears.
Still, DesRosiers understands the bind dealers are in.
“The pressure is tremendous. They are operating on margins that are razor thin. The return on sales is two and a half per cent and that’s it.”
That pressure includes stair-step programs used by some mainstream automakers.
“Ultimately, it forces dealers to take advantage of the consumer because the dealer is desperate for a sale. That’s why, in the U.S., it’s banned in many states.”