Massive mortgage debt is top of mind for Bank of Canada Governor Mark Carney, but in his quest to curtail Canadians' borrowing, he might want to start thinking about the vehicles sitting in their driveways and garages, too.
The use of long-term loans to purchase new vehicles is skyrocketing, as car buyers look for ways to cut or hold steady a key component of a family's spending – the monthly car payment.
More than half the Canadian car buyers who borrow to finance their vehicle purchases are taking out loans longer than six years, according to new data from J.D. Power and Associates.
That is a huge increase from just five years ago, when 14 per cent of buyers borrowed for six years or more, said J.D. Ney, an automotive account analyst in the consulting firm's Canadian office.
Mr. Carney has been warning since 2009 – and with particular urgency in the past year – that Canadians' debts are getting out of control. In the first quarter, personal debt reached 152 per cent of disposable income, a record.
His warnings have been amplified by the International Monetary Fund and Federal Finance Minister Jim Flaherty, who has tightened mortgage rules several times in a bid to cool an overheated housing market.
But the big increase in the cost of buying a home, combined with stagnant incomes, has forced Canadians to find ways to hold the line on other monthly payments.
Enter the auto makers and financial institutions with interest-free loans of as long as eight years. Free money for seven years is common at the moment at your neighbourhood car dealer – highlighting the fact that auto makers, which began using cheap financing well before the industry crisis of 2008-09, have been unable to resist returning to it as a tactic for luring buyers into showrooms.
The jump in long-term car loans is "another sign that households are under tremendous pressure and that they're finding any way they can to stretch out their payment or keep a lid on their payment," said Douglas Porter, deputy chief economist of BMO Capital Markets.
Growth in non-mortgage debt has actually dropped to its lowest pace since the early 1990s, Mr. Porter said.
But "when people have to get another car and trade in their older one they may be coming back with some debt still owing," he noted. "So we could see some of those debt numbers start to crank up again."
That's precisely what J.D. Power data are showing.
In 2007, 17 per cent of buyers were trading in a vehicle that wasn't paid off. Now, 26 per cent of buyers are in that position.
"Consumers today just don't think of the car as being $28,500," said Mr. Ney. "They think of it as being $500 a month. There's a certain pain threshold – whatever it takes, we'll try and keep that [same] monthly payment."
Another factor behind the loan growth is the decline in leasing as a means of purchase. Monthly payments on leased vehicles are generally much lower than monthly payments on loans.
Until the credit crash of 2008, more than 40 per cent of buyers leased their vehicles rather than financing them or purchasing them with cash.
Leasing all but disappeared during the recession and is only slowly returning. It represented just 17 per cent of new vehicle purchases in the past 12 months, J.D. Power said.