With the demise of leasing in Canada has come the rise of long loan terms stretching out to 84 months or more. Seven or eight years to pay off a car loan? Good or bad news for buyers?
"Some critics believe these tactics provide only an illusion of affordability and just encourage higher consumer debt loads," says Andrew Tai, founder and CEO of the pricing and dealer referral web site unhaggle.com. "However, new cars are now better built than ever and have increased expected lifespans that could easily outlast an 84 month loan."
At which point a lot of owners are thoroughly sick and bored of what they've been driving for the better part of a decade. Good or bad, long loan terms have become extremely popular in Canada. According to the Power Information Network (PIN), 62 per cent of new vehicle loans in Canada stretch to 72 months or longer. Given that 61 per cent of new vehicle buyers in Canada finance, many buyers are married to a financial institution for what for some will feel like a lifetime.
Leasing accounts for just 19 per cent of new vehicle transactions in Canada, notes PIN – with cash buys making up the remaining 20 per cent. Leasing at its peak accounted for nearly half of all new vehicle transactions in Canada and in some regions leasing approached 60 per cent or more of the market.
Leasing's main appeal is simple: a lower monthly payment primarily based on the portion of the MSRP (manufacturer's suggested retail price) that depreciates over the lease term. Basically, a lease is a long-term rental. But with the financial crisis came a tightening of money markets that had funded leasing. So far, leasing has not made a comeback resembling what we saw a decade or so ago. In place of leasing, we now have loans that stretch out seemingly forever.
"Over the past several years, we've seen auto makers battle weak sales by trying to make new cars more affordable by extending the available loan maturities and combining them with attractive finance rates," says Tai. "It's fairly common now to see 84-month financing terms for even 0.0 per cent these days."
Car companies generally prefer leasing over long-term financing. With a lease, customers are back shopping for a new vehicle every two, three or four years, whenever the lease ends. With 84- or 96-month finance payments, buyers are often left out of the new-car market for years as they pay off their loans.
Yes, it's possible to sell a vehicle on which an owner is making payments, but it's not always easy. And in a great number of cases, the owner is "under water," owing more on the loan payment than the vehicle is worth on the used market. This is not a small problem. PIN data shows that 30 per cent of vehicles at trade-in in Canada are in a "negative equity" position – the vehicle is worth less than the outstanding loan amount.
Consider that a warning about taking on a loan that stretches into the next decade. Moreover, the fattest sales sweeteners are usually available to cash buyers only.
But not always. Tai points to the Toyota Yaris subcompact and Hyundai's Sonata Hybrid as stand-out deals available with both cash discounts and financing deals – the deals can be "stacked" or combined, Take note of these deals. More often than not, "auto makers make the customer choose between a lump-sum cash rebate or a subsidized finance rate. This is most often seen with the import brands."
The Yaris, a subcompact sold in both hatchback and sedan form, is being offered with what Tai refers to as an $885 factory incentive that is equivalent to $1,000 "after-tax incentive." Add in Toyota Canada's 0.0 per cent financing for 84 months plus $534 in "Unhaggle" savings real customers have averaged and the monthly payment on a $16,325 Yaris three-door hatchback with automatic transmission and air conditioning is an affordable $222.45, notes Tai. The question to ask: do you want to make payments on a Yaris runabout until 2020?
That Yaris monthly payment looks pretty good compared to a $19,995 Fiat 500 Lounge two-door hatch. This is where a discussion of interest rates comes in. Fiat is offering a $2,500 before-tax sales sweetener that can be combined with 2.99 per cent financing for 84 months. With Unhaggle savings of $783, the monthly payment comes to $278.75, or $56.30 more per month, even though Fiat has a much fatter cash incentive in play.
Meanwhile, the Sonata Hybrid is on offer with a $4,000 factory discount plus 3.19 per cent financing for 84 months, plus Unhaggle savings of $2,229. Monthly payment until 2020: $352.71. And finally, Ford's Mustang GT is a sexy beast with a factory discount of $3,500 on the table, plus 5.89 per cent financing for 84 months and Unhaggle savings of $2,794. Monthly payment: $647.62.
For the record, the Unhaggle savings essentially represents a dealer discount, or that portion of the dealer's profit margin being thrown into the deal. Tai says many buyers are surprised at how tight the dealer margin is, in fact. The mark-up on a new vehicle is not that rich, as these deals indicate.
Deals of the Week consulted with unhaggle.com and other sources on these offers, including carcostcanada.com. As usual, pricing information here is subject to change, so consult your dealer for all the final details, including expiry dates for all offers.
2013 Toyota Yaris 3dr HB Auto CE with Air Conditioning
- MSRP: $16,325
- Freight, dealer prep, air conditioning tax: $1,630
- Factory discount: $885
- Unhaggle Savings: $534
- Total savings: $1,419
- Taxable subtotal: $16,536
- Total price with 13 per cent HST: $18,685.68
- Available with 0.0 per cent financing for 84 months
2013 FIAT 500 2dr HB Lounge
- MSRP: $19,995
- Freight, dealer prep and air conditioning tax: $1,830
- Factory discount: $2,500
- Unhaggle savings: $783
- Total savings: $3,283
- Taxable subtotal: $18,542
- Total price with 13 per cent HST: $20,952.46
- Available with 2.99 per cent financing for 84 months
2013 Ford Mustang 2dr Coupe GT
- MSRP: $39,299
- Freight, dealer prep, AC tax: $1,685
- Factory discount: $3,500
- Unhaggle savings: $2,794
- Total savings: $6,294
- Taxable subtotal: $34,690
- Total price with 13 per cent HST: $39,199.70
- Available with 5.89 per cent financing for 84 months
2013 Hyundai Sonata Hybrid 4dr Sedan
- MSRP: $27,999
- Freight, PDI, AC tax: $1,700
- Factory discount: $4,000
- Unhaggle savings: $2,229
- Total savings: $6,229
- Taxable subtotal: $23,470
- Total price with 13 per cent HST: $26,521.10
- Available with 3.19 per cent financing for 84 months
Pricing information source: unhaggle.com and carcostcanada.com. Calculations based on Ontario customers. Please note that while the information above is accurate at the time of publication, incentives are given at the discretion of individual dealers, and may be changed or discontinued at any time. Where noted, "dealer discounts" are negotiated with the customer on a case-by-case basis. Unhaggle Savings are actual discounts received by Unhaggle customers.
Correction: Some of the figures, including the total price, for the Fiat 500 were incorrect in an earlier version of this story. The story has been corrected.