Have you noticed when the mainstream media catches on to "something" everyone has an opinion, several did a study, and suddenly we are close to hitting the alarm button.
This past week auto loans have captured the imagination of numerous pundits, with a myriad of pedestrian opinions.
Sometime time ago we shared our thoughts on the entire auto financial services in Canada with Money for the Deal.
The picture painted today by the mainstream media is that CMS (Citizen Main Street) is highly leveraged and if interest rates increase auto loans will default before mortgages. In addition to the longer loan terms extended on auto loans.
Lets consider a few points:
Cash Flow: In the glory days of leasing in Canada over 40% of new vehicles sold were leased, and afforded on cash flow. Extended term loans are the replacement of leasing enbling CMS to still drive with cash flow.
Consumer Risk: CMS is astutute in letting manufacturers with their incentive programs relieve them of the value risk of the vehicle they "own" by trading it in on a new vehicle.
36 Months: Remains the magic number for the auto industry to function at its best. The loan might be 96 months but the trade cycle remains 36.
Loan Interest Rate: The low rates down to 0% are supported by the manufacturer, its always a cash incentive of "xyz" or a rate of 0%. In most instances CMS picks the rate.
Lender Risk: Have you noticed...since major Canadian banks are more active with auto loans more vehicles are sold in Canada. Are manufacturers supporting a "risk factor"?
Big Data: Permits manufacturers and financial service providers to calibrate the monthly offers, incentives, to maximise sales.
Dynamic Pricing + Incentives: Manufacturers and financial service providers make extensive use of dynamic pricing and incentives to increase sales and capture new customers from competing makes. This strategy will endure.
Technology: Permits the dealer and CMS to quickly and efficiently close a deal on the basis of a "monthly payment".
Maintenance: CMS has a limited appetite for performing maintenance on a vehicle beyond replacing the wear items. Yes...maintenance can quickly devour several months of payments, in addition to being unpredictable at times.
Paradigm Shift: From vehicle ownership to vehicle usage for a monthly fee. If CMS is in a "trap" of monthly payments, manufacturers are in a "trap" of constantly enabling CMS to trade, and roll over deficiencies.