There is growing concern among senior executives in the auto and financing industry about long-term loans that some car companies are offering to entice buyers and boost sales.
Auto consumers have been increasingly attracted to long-term loans with low monthly payments. But industry executives are worried that customers will return to showrooms before the seven or eight-year terms of their loans have been completed and find that they owe more on the their vehicle than what it's worth as a used car.
"Longer amortizations are not good for the industry or for the consumer," said Raymond O'Kane, managing director and head of national dealer finance for Bank of Montreal.
"We make good loans at the time," Mr. O'Kane said at the annual TalkAuto Canada conference in Toronto Wednesday, "but nobody can predict that far out. Peoples' lives change."
The auto industry's increased use of long-term loans and low-cost financing has helped boost sales to record numbers. But at a time when Canadians are already carrying heavy mortgage debt and other liabilities, the growth of financing in the auto sector is adding to worries about overleveraged consumers.
Mr. O'Kane's comments were echoed by Ford Motor Co. of Canada Ltd. president Dianne Craig, who said Ford does not offer eight-year loans as some other auto makers do.
Ford has also tried to stay away from offering seven-year loans, Ms. Craig said, in favour of four-year leases as a way of keeping monthly payments low for customers.
"The bigger concern is from a consumer point of view because obviously they're going to have negative equity," she said.
"We want them back and we want them happy," she said.
The monthly payment on a four-year lease is about the same as the monthly payment on an eight-year loan, she noted.
Among the long-term financing offers in the market are Hyundai Auto Canada advertising eight-year, interest-free loans on some 2014 Accent and 2015 Sonata models. Seven-year, interest-free loans are common and have been offered by General Motors of Canada Ltd. on its full-sized pickups at various points this year.
One high-ranking industry source said he has seen data showing that eight-year loans have grown to 14 per cent of the market since they first became prominent after the recession. About two-thirds of purchasers finance their vehicles through loans.
Mr. O'Kane said he believes eight-year terms make up at least 10 per cent of the new vehicle loan market.
Bank of Montreal's maximum term on a new car loan is eight years, he said, but he urged dealers and industry officials attending the conference to make it clear to consumers that the monthly payments on five-year loans won't be significantly higher than those on six-year loans and it means consumers eliminate that debt a year earlier.
"It's doing the right thing for customers," he said.
Loans of six years or longer make up about 69 per cent of the Canadian auto loan market, said Jeff Schuster, senior vice-president of forecasting for consulting firm of LMC Automotive. That compares with 57 per cent in the spring of 2012.
Incentives such as interest-free loans for seven or eight years have helped propel vehicle sales in Canada to a record pace. As of the end of October, auto makers were on pace to sell more than 1.8 million new vehicles in Canada, which would be the first time the industry has topped that mark and the second straight annual sales record.
"We believe zero per cent ads are driving a lot of people into the showrooms," said Josh Bailey, vice-president of research and editorial for Canadian Black Book, an industry data service company.
Ms. Craig of Ford said the strength of the market in 2014 has taken Ford by surprise, but she forecast another increase in sales next year to 1.93 million vehicles.
Mr. Schuster of LMC Automotive is less bullish, forecasting that sales will end at about 1.84 million vehicles in Canada this year and rise slightly in 2015.