Have you noticed the ongoing concern regarding auto loans. Consumers are getting in perhaps precarious situations with auto loans.
Agreed loans have increased appreciably during the past few years in pace with increased auto sales in Canada, accompanied by the increased participation of banks.
The old model was based on ownership and equity. Under these antiquated perspectives auto loans are out of control and are headed for a day of reckoning.
A couple of years ago, and it still resonates we shared our thoughts with Money for the Deal. As we say...we don't follow we lead, we were prescient back then as to where it was headed. While no longer subscribing to the old ownership and equity model.
Lets look at a few relevant points from back in the day:
- Financial services are an intrinsic part of the auto business. In addition to being lucrative to the providers of these services.
- Back in the day when these services were provided by "captive" (owned by the manufacturer) serive providers, the model was based on ownerhip and equity.
- The advent of leasing, especially for luxury cars (to improve the affordability) initiated a change.
- A myriad of forces constatntly trying to keep Canadian banks out of the mainstream financing upheld the conservative status quo.
The Canadian consumer enabled and empowered by manufacturers, and financial service providers has evolved from owenership to mobility, from equity to cash flow. There is no desire to own a technologically complex vehicle beyond the warranty period. With a limited desire to invest/spend money maintaining a vehicle.
Lets look at a few relevant points from today:
- Manufacturers subsidise the financial services although money is cheap, its even cheaper for autos loans and leases.
- Although the finance terms are longer, the trade cycles are a constant, as well as the monthly payments.
- Negative equity is manageable within the current parameters.
- There is an uptick in leasing penetration to alleviate the longer finance terms.
- Monthly manufacturer incentives erode the value of used vehicles.
- Manufacturers and dealers require recent model trade ins/lease return to uphold their CPO programs.
Until we view the auto business and the financial services from the old perspective of ownership and equity the current model makes little sense and is a recipe for disaster.
Under the current model of mobility and cash flow. The pressure is on the manufacturers to provide relevant financial services that are responsive to consumers. More important to uphold the trade cycle of 36 months.
From our perspective the Canadian consumer is WINNING. While the new model has generated record sales in Canada.
What do you think?