Rising rates of interest and excessive costs are pushing extra used-vehicle consumers into “frighteningly” prolonged loans, stretching shopper budgets whereas creating each alternatives and dangers for Canadian vehicle sellers.

Used-vehicle loans with financing phrases of 84 months now account for about 45 per cent of the used-vehicle market, up from 38 per cent final yr and 25 per cent in 2021, mentioned Robert Karwel, senior supervisor of J.D. Energy’s Canadian automotive observe.

“You solely enhance your amortization for one cause: It’s to keep up a decrease month-to-month cost to keep up the household finances,” Karwel mentioned.

J.D. Energy collects used-vehicle information from franchised sellers and quite a few used-vehicle centres, Karwel mentioned. Which means the pattern skews to the “newer and nicer” facet of the used-vehicle market, with most automobiles as much as eight years outdated.

However longer loans have gotten extra widespread throughout the whole section.

Patrons with poor credit score or no credit score are additionally more and more choosing a “time period stretch” to 84 months to maintain their month-to-month funds inside attain, mentioned Andrew Abraham, CEO of the Ottawa-based subprime lender OCM Auto Financing Group Ltd.

“They want a car. It’s a approach to get their youngsters to soccer observe, the best way to get to work,” Abraham mentioned. “As folks get exterior the town limits, they want their automobiles as a result of public transportation isn’t accessible.”

2021 A SORE SPOT FOR PRICES

Used-vehicle mortgage phrases have been trending longer for a while, however the momentum accelerated in 2021 as used-vehicle costs spiked, mentioned Daniel Ross, senior supervisor of business insights and residual-value technique at Canadian Black Ebook.

The worth of the common used car topped out at between $38,000 and $39,000 final yr and has since dipped to about $36,000, Ross mentioned.

“We’re seeing issues come down somewhat bit, however we’re nonetheless far and above even the place we have been in 2021.”

With excessive car values and excessive rates of interest compromising affordability, consumers — notably entry-level ones — have been compelled to increase borrowing time frames, Ross mentioned.

“Shoppers want to keep in a constant month-to-month cost vary to what they have been used to beforehand, so the one factor that they’ve is to elongate that mortgage time period,” he mentioned.

Ross, Karwel and Abraham see little aid in sight for consumers as each new- and used-vehicle inventories stay tight.

UPSIDE: MORE F&I SALES

For sellers, nevertheless, the longer mortgage timelines are creating alternatives.

Finance and insurance coverage merchandise, as soon as pitched when promoting new-vehicle gross sales, are more and more widespread on the used facet, Ross mentioned.

“As a lot as you’d beforehand have mentioned, ‘No, I’m not desirous about that form of stuff,’ now you need to cease and … give it some thought as a result of now you’re going to be proudly owning that car for thus many extra years,” he mentioned.

Greater used-vehicle costs are additionally pushing clients into vehicles which might be a number of years older and thus already or almost out of guarantee, Karwel mentioned. Coupled with the longer mortgage parameters, this permits sellers to promote service contracts “left, proper and centre.”

“It’s not stunning that buyers are additionally shopping for increasingly surety merchandise to guarantee that they don’t face an costly out-of-pocket restore, based mostly off the truth that their used automobile was costlier than ever, they usually took a long run to finance it than ever,” he mentioned.

FEWER REPEAT BUYERS

Although sellers are making more cash on F&I, there’s a draw back to the present atmosphere, Karwel mentioned.

If a buyer places the minimal down on a used car and takes as a lot as seven years to pay it off, it can take a very long time for that purchaser to turn out to be a repeat buyer.

Sellers will join with clients on the service facet, however long-term financing places consumers on the sidelines for years, versus available in the market for a brand new car, mentioned Ross of Canadian Black Ebook.

“You’re not going to see that buyer all that usually, in order that’s not as massive a revenue centre,” he mentioned. “Now you’re going to have to take a look at conquesting extra clients.”

The longer phrases may additionally have an effect on car provide.

Used-vehicle costs are already excessive by historic requirements, Ross mentioned. However with longer mortgage phrases, these automobiles will probably be coming again available on the market much less regularly, hollowing out stock and probably driving costs up additional.

The booming gross sales of service contracts and different surety merchandise point out that buyers are already “digging in” with the car they’ve, Karwel mentioned. Going through excessive costs, excessive rates of interest and the problem of merely discovering a car over the previous 21⁄2 years, Canadians, he mentioned, are more and more planning to “hold this experience for so long as humanly doable.”