By on October 9, 2013

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GM Canada’s CEO is expressing apprehension over the way cheap auto loans are fueling vehicle sales in Canada.

In an interview with The Globe and Mail, CEO Kevin Williams said

“Macroeconomically, there’s some reason for optimism [but] nobody in the industry had the industry pegged at this number,” Mr. Williams said. “Nobody had the industry running this high.”

2013 is expected to see a record 1.73 million new vehicles, but much of the growth seems to be stemming from long-term loans designed to keep payments low.  According to a JD Power study cited by the Globe, 64 percent of Canadian car loans have terms lasting for 6 years or longer.

Consumer debt has been a controversial topic in Canada, with Canadians taking on accumulating record debt amid low interest rates and easily available credit. But the concern over easy credit in the auto sector is unlikely to become a systemic risk, even as interest rate hikes loom on the horizon.

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54 Comments on “GM Canada CEO Sounds Alarm Over Cheap Loans...”


  • avatar
    April

    If they are worried then do not offer 72 month loans via their financial arm Ally Financial.

    I realize cars last longer than ever before but 6 years of risk of default. No thanks.

    • 0 avatar
      highdesertcat

      My impression is that the lender wants to ensure a revenue stream for the mid-long run, thus hooking as many people as they can who can make those payments.

      My definition of a run is 0-3 years = short run; 4-7 years = mid-long run; 8 years and up = long run.

    • 0 avatar
      BrianL

      GM doesn’t own Ally. But even if they didn’t do it, other auto manufactures will do it and get the sales accordingly. Besides, people can use their own banks to get auto loans.

      When interest rates pick up, cars sales will go down. I would also guess that transactions prices will go down a little as well.

  • avatar
    sirwired

    A six or seven year loan is perfectly reasonable with a modern car, with the important caveat they they need to be pushing gap insurance heavily with those loans for the lengthy period where they will be upside down. (Probably 2-3 years…)

    • 0 avatar
      mikey

      @sirwired..Agreed, however I would say they will be upside down for close the four years. At the four to five year mark,your looking at wear items tires,brakes belts, fluid changes. You still got 24 payments left.

    • 0 avatar
      afflo

      GAP insurance is the biggest scam in car sales. If you’ll go upside-down, you’re either fronting too small a down payment, or buying too much car. Adding another $500-1000 to the cost of a car you can’t afford is a foolish answer!

    • 0 avatar
      JuniperBug

      I’m of the opinion that if you can’t afford to pay it off within 3-4 years, you can’t afford it. There are exceptions to this, of course; someone who struggles to pay off something like a Yaris in 4 years may still be better off going this route as opposed to a used car which will cost more in financing, non-routine maintenance, and reduced service life (But then again, maybe not). But if you’re in a situation where you can afford at least a new economy car, I don’t see it justifiable to get something considerably more expensive than what you can pay off in 4 years.

      Some people are ok with always having a car payment, but I’m not one of them, not when there are more responsible and worthwhile places I could be putting such a large chunk of my average-level income (real estate, savings/investment funds, travel with loved ones). My reasoning is thus: take a loan for 3-4 years, continue to drive the car for another 3-4 after it’s paid off, while making the equivalent “payment” into a savings account. By 6-8 years, a car driven an average amount of miles will still have life in it, but may start to need some bigger-ticket items. But look at that: you’ve now got enough money saved up to pretty much pay cash for another new car, plus the equity you still have in your old car, should you decide to go that route. At this point, your cycle of being in debt for a car is over and done with forever, assuming you continue along the same path. Or, alternatively, you’re in a better position to upgrade to a higher-end (or larger, if a growing family is a factor) car, should you feel your finances can justify it. Either way, the plan is sustainable. Spending your whole life paying interest to a bank for a car, in my opinion, is not sustainable, or at least not justifiable.

      • 0 avatar
        sirwired

        I think the 3-4 year repayment rule certainly applied 15-20 years ago, where the likelihood of a major repair went dramatically upwards after 4 years or so.

        With today’s cars, as long as you don’t total the thing in an accident (which is where GAP comes in), the car should be mechanically just fine for the entire loan term. It’s rare (if not unheard of for major design screwups) for a car to need any sort of value-destroying overhaul, like a new engine or transmission, before 150k or so.

        • 0 avatar
          JuniperBug

          That strategy still leaves you with a perpetual auto loan. Why would you choose to do that when it’s really no big deal to hold back a bit and be payment- and interest- free as early as your second new car?

          I find it very odd that people are complaining about the relatively small expense of higher gas prices, talk about how we’re in an economic crisis, too much debt, etc., yet still feel justified in paying thousands in interest – not even mentioning the additional purchase and maintenance prices – of having a fancier ride to drive to work and the grocery store with.

          If you can afford it, buy whatever car you want, but if you need a 6-8 year loan on your car and still feel justified in buying something premium, I shake my head and have little sympathy when you complain that your finances and the economy are in the toilet.

  • avatar
    olddavid

    I would much more trust CIBC, TD, Bank of Montreal and their ilk to straighten the house out than a Blankfein or a Dimon. Institutional failure on the scale of 2008 not imaginable in Canada. They wouldn’t approach the edge let alone peer over it. Not in the cultural DNA of Canadian banking. My humble opinion. May be skewed by my Albertan childhood and American aging. Damn glad to have both countries claim me, however reluctantly.

  • avatar
    Aleister Crowley

    This will not end well.

  • avatar
    Felix Hoenikker

    The real Canadian elephant in the room is the high mortgage debt. The Canadian housing market never corrected after 2008 like it did in the US. The bubble keeps inflating albeit at a slower pace that happened here. Hoever, all bubbles burst. With mortage debt taking a higher percentage of after tax income, it would be expected that auto loans need to have longer terms to make them affordable.

    • 0 avatar
      vertigo

      Yeah, no kidding. My lady and I have been looking recently, and I absolutely choke at the fact that $400,000 only gets me a semi these days (southern Ontario). It’s utterly disgusting and tremendously overvalued.

    • 0 avatar
      burgersandbeer

      I wasn’t aware the housing market corrected in the US. Even at their low point, housing in many markets was still expensive relative to income.

      • 0 avatar
        Onus

        It corrected here but, it depends on the location. I can buy a house for 40,000 grand if i wanted too. It never came back here after it crashed.

        But a good house is like 200,000 here. Not bad.

  • avatar
    cdotson

    “Nobody had the industry running this high.”

    Is that true? Isn’t it time for an update on TTAC’s “Grade the Analysts” or whatever you call it?

  • avatar
    alexndr333

    Consumers in the US are supposedly chastised by the Great Recession, taking on less debt and holding cash out of the stock market. Yet, long-term auto loans stand out as an anomaly. My guess is that one major factor is the owner’s last car. Many were kept for eight, ten or twelve years, and the generally high quality of all cars made this possible. Perhaps people are thinking that their next car will be another ten-year appliance such that a six-year note seems reasonable.

  • avatar
    vertigo

    The local Dodge and Hyundai dealerships are pushing 96 month loan terms on their new cars. 8 years. 8 FRIGGIN YEARS! I never have and never will go longer than 36 months on any car.

    • 0 avatar
      dmw

      Why not? I got 72/0 on my last car. Free money. I was never upside down but putting more money down would have been foolish given the spread between zero and, say, my money market account performance. If you have good credit they are throwing down the zero, cash option or no. In fact, it was probably foolish to put any money down. I could have just used the down payment to buy some Treasury Bills and used the proceeds to subsidize the note, right? Of course, if you have poop credit they will dig out the business card of that special lender who will let you smell the coffee real quick. This of course is the real difference with mortgages. There is no HUD and Fannie Mae shoveling people into over valued houses they can’t afford with no down payment. I don’t think that car loan defaults are going to Threaten the Recovery.

      • 0 avatar
        JuniperBug

        From what I gather, dmw, you have the money to pay off the car in less than 72 months, and merely chose to take advantage of the free money the bank/dealership was offering you. That seems perfectly reasonable. Legitimately needing 72 months to pay off a car, on the other hand, in my opinion, isn’t. Imagine having just spent 6 years making payments on a car and having nothing to show for it but a 6 year-old car. At 0%, ok, maybe you can deal with that, but I’m pretty sure that many people who will be doing this won’t qualify for the 0% and will wind up with a perpetual car payment. I can guarantee one thing: interest rates won’t stay as low as they are now forever.

      • 0 avatar
        28-Cars-Later

        You pay for that privilege with absurdly high vehicle prices for most models. In a market with realistic interest rates, people have less money and won’t be as willing to carry such a high balance for nearly as long. Eventually prices fall as currency (in theory) becomes more valuable.

        • 0 avatar
          JuniperBug

          To be sure, the 0% is a distortion, but you won’t necessarily get a lower price if you don’t take the financing. At that point, you’re pretty much walking away from free money if you don’t take the financing. It’s certainly not a realistic model, but sometimes you have to make the fucked up world work in your favour.

        • 0 avatar
          Onus

          The problem is Currency is not devaluing. They refuse to let it deflate which is good for savers and bad for people with loans.

          • 0 avatar
            28-Cars-Later

            Honestly I’m no economist to get into a serious discussion but I’ve noticed all real assets and most commodities have gone up significantly in price the last few years and most commodities have followed suit. I would think this could be defined as inflation.

            A little bit off topic but I couldn’t find the article I read at the time, but this Wharton one explains how the House of Saud and others in the Gulf region bought off their people with billions in social spending during the 2011 Arab revolts. The original article I read at the time (may have been in FP) cited a figure of $70/bbl (in 2011 dollars) for oil in order for the Saudi gov’t to operate with these new social expenditures, meaning the Saudis cannot let oil drop below this figure for any length of time. The billions in dollars created out of thin air every month will eventually increase this $70/bbl figure over time regardless of crude demand, an issue directly related to the value of currency.

            http://knowledge.wharton.upenn.edu/article/to-stave-off-arab-spring-revolts-saudi-arabia-and-fellow-gulf-countries-spend-150-billion/

  • avatar
    dash riprock

    Maybe GM, and every other manufacturer, can reduce the needs of longer term loans by selling their vehicles at similar prices as they do in the US.

    Up here it seems that it was Chrysler that was leading the way with extended terms of up to 96 months. Know someone who took a loaded GC on this type of loan and I shudder to think of the hit they will take when they want to get out of it before the term ends.

    • 0 avatar
      Scoutdude

      I predict that those 96 month loans will end up being a self-inflicted wound in the long run. As you say someone wanting to get out of the vehicle before the loan is almost all the way up will have to take a big hit if they go to trade it in. So many will look at that big chunk of money needed to cash out their old car, not be willing and/or able to do so and thus not be in the market for a new car for 6 or 7 years instead of 4 or 5.

  • avatar
    Lou_BC

    There have been a few Financial Experts (is that an oxymoron?) saying that interest rates need to rise. Politicians and the Bank of Canada have been reluctant to increase prime due to the weakness of the economy. Canadian personal debt is approaching where the USA was in 2008. There are markets like Toronto, Vancouver, and Calgary where some experts are saying that buying a home is foolish. Canadian financial institutions overall are more conservative and face tighter rules than in the USA but regardless of that fact, if we pile on too much debt, we eventually will have to pay the piper.
    Recessions occur when we have no choice but pay off our debts. Real economic growth is tied directly to borrowed money. If we removed borrowed money from the economy, we would of seen stagnant grown for the last few decades.
    Living on borrowed money is like going to a New Years party and drinking way too much. Once you run out of booze, you end up with a bad hang over and your head in the toilet.

    • 0 avatar
      Onus

      The same could be said of Australia i hear. They have astronomical house prices.

      But, its funny that in the US money is so cheap yet people still refuse to get loans. Slowing the economy. The currency needs to deflate a little bit which they refuse to let it do.

      • 0 avatar
        Big Al from Oz

        @Onus
        There’s one difference.

        In Australia people have been paying down debt.

        We don’t have the problem that the Euro/Japanese/US have.

        Even though home prices are high by US standards we have better regulatory controls on the banks, ie, if you lend money you better have something to back it up.

        Our banking sector is probably the safest in the world.

        That’s the difference, the ability to pay back what you borrow.

        • 0 avatar
          Onus

          You also have much higher wages on the lower end. I think minimum wage there is still higher than what i maker here and i don’t feel like I’m under paid.

          Honestly think I’m overpaid for what I’m doing. Easier than my last job but it pays $4 more an hour. I was underpaid their so it probably a bad comparison.

          I was doing research and the cost to rent a place to live in most places is a fair bit higher than here. Then i suppose the fact that goods probably cost more. It probably all works out to about the same standard of living in the end.

          • 0 avatar
            Big Al from Oz

            @Onus
            Rent is much higher here. That is what kills us in the cost of living comparisons of nominal vs PPP.

            The difference in other costs isn’t as high and in some cases we pay much less for services.

            I own some rental properties, this is great in Australia. Return on rent is very good.

            So far, we have done okay, but things can change quickly. We just hope we don’t end up like the US, Japan and most of the Eurozone.

            We don’t have the disparity like the US between rich and poor. We do have some poor though, but not like the US and some areas of Europe.

            http://www.smh.com.au/business/the-economy/aussies-the-worlds-richest-people-credit-suisse-20131009-2v7qy.html

  • avatar

    a GM executive telling it like it is, being honest and also spot on. been awhile.

    • 0 avatar
      Dimwit

      It’s because it’s in Canada. We don’t put up with the happy horseshit that usually comes out of the C suite. You may notice though, that they never seem to be able to penetrate into the C suite in the RenCen. Too bad.

  • avatar
    Big Al from Oz

    I believe if you can’t pay off a vehicle within a 3-4 year period you shouldn’t purchase.

    These longer term loans is creating a poor environment for future sales as well.

    Couple these longer term loans with the current lease plans doesn’t bid well for the future sales of the industry.

    Short term gain might end up providing for longer term issues.

    Look at the current vehicle market in NA, are the current rate of sales sustainable over the longer term.

    You will have people paying off vehicles over the next 5-7 years, you will then have people with expired leases.

    I can foresee a situation similar to a ‘cash for clunkers’ developing, many newish cars that don’t require replacing, unless the economic activity increases sharply.

    Canada might fare a little better than the US.

    This is where government regulation has to come in to provide some commonsense to the people who have little.

  • avatar
    jim brewer

    Any accountant will tell you that the loan should approximate the expected life of the asset, conservatively stated. The GM exec’s concerns are self-serving. Longer loan means the buyer is more likely to stay out of the new car market until the loan is paid off.

    A bigger problem is exploitative sub-prime loans. If they want to complain about something, that would be a better bet.

    • 0 avatar
      Big Al from Oz

      @jim brewer
      What you stated makes sense.

      The ‘but’ part is the amount of money that is expended on a single item over that length of time and the impact on the wider economy.

      Creating a situation of the consumer dedicating a larger and longer part of their income into one product has to remove money from other areas of the economy.

      I do know when I was younger in the 70s, you were unable to get a motor vehicle loan for longer than a 36 month period.

      You were forced to look at what you can afford in the shorter term.

      What I see is the manufacturers creating and supporting financial products for shorter term gain.

      What about the longer term for the industry?

      I read a very interesting article on Gillette. It talked about how the shaving industry is reaching its full potential. The article stated that Gillette has to introduce ‘new and better’ products that are more expensive, but they aren’t necessary. Has the NA vehicle market reached this? Is growth going to be reduced? Is the NA car fleet going to age and reduce in numbers?

      Affordability? Standard of living? Selling high end product to increase profits, like Gillette is doing.

  • avatar
    Dimwit

    One of the big deals in Canada is the sky high transaction prices. It’s far ahead of any inflation rate. Incomes have just not kept up. Everything now has been reduced to the payment. Make the payment affordable at all costs. It’s a crappy way to do business.

  • avatar
    Hummer

    I’ll take a 36 MAX only if its 0 interest, other wise I’ll save up and buy in full.

    No need for regulation, if you can’t cure stupid, at least enjoy watching it.

  • avatar
    AGR

    The average Canadian consumer has a monthly payment of approximately $500 per month for a vehicle, the terms are long to allow dealing with deficiencies with trade ins.

    The term is irrelevant to the consumer, its the monthly payment that closes the deal. Since GM has gone from 1st to 3rd place in Canada, they are commenting on the state of indebtedness instead of selling vehicles like everyone else in Canada.

    “Keep the payment the same, take me out of my trade, and give me a new vehicle”. The astute manufacturers are moving iron, GM is on the sidelines watching.

    • 0 avatar
      MoDo

      Pretty much nailed it, but GM still sells boat loads of cars here. Their problem is that Chrysler and Ford are currently selling more appealing vehicles.

      GM is currently in the “step back to step ahead” stage and some of their cars have been a little over-reaching (Buick Regal for Audi A4 prices – not gonna happen this soon, maybe one day, MAYBE) and that kinda permeates throughout their entire line up.

      HOWEVER, they currently have a 3 year lease on the ATS for $399 w/ 20K kms a year. I think its 0 down, 0 due on delivery and they make your first payment.. Now THAT might sway me from a 3-series…because the ATS has been kicking its ass in comparisons since it came out. Its actually a good car…

  • avatar
    afflo

    The norm among folks I know seems to be a two-car family – they sort of alternate on the cars – one payment at a time, so they have the payment approximately half the time they own the car. Sometimes they take a “it’s so nice to not have payments” break, but mostly they alternate.

    Maybe I don’t know enough financially despondent status-chasers!

  • avatar
    Jeff S

    @Big Al–good analogy to the shaving industry. In reality a good two edged safety razor produces better less expensive shaves, but gimmicks sell. Long term no or low interest car loans create an increase in vehicles sales, but then this is at the expensive of long term sales. My wife and I bought the 2013 Honda CRV with a 60 month 0.9% interest which comes to about $770 interest over the life of the loan. We were not given a discount for paying cash and that is why we took the loan. I have always paid cash for my vehicles, but it made more sense to use Honda’s money and leave mine invested. But getting back to your point we plan on keeping the CRV for 10 years.

    @Lou BC-It will be one heck of a hang over once many have to start paying the piper and that is not just the borrowers but the the auto industry as a whole. Like robbing Peter to pay Paul.

  • avatar
    krayzie

    I suggest people google “Money As Debt” to understand why we are in this current situation right now.

  • avatar
    Doh

    Easy People.

    #1, should people not lock in on the super low interest rates now? 5, 6 even 7 years from now the rate’s will not be at this Historical Low.

    #2, Yes Vehicles are lasting longer, (and I live in the Rust Belt) So most will last until the end of thier loans.

    #3. Starting in the Business, I witnessed 17.9% Loans, and People calling it a “Last Time Buyer Program” on a 60 month loan. Meaning that it will depreciate quicker than the Customer is paying it off. Almost 20% was going to the Bank. Now loans are 0-7%, Why not lock into that, More Vehicle, Less going to the Bank. Maybe the Customer Won’t need to trade out of it sooner to meet thier nedds.

    #4 Why is GM Canada’s CEO bringing this up? GM Canada is the one that brought 0% financing to Canada. Way back in 1998. Financing at the time was , Then GM dropped the bombshell of 0%. Smart Customer’s traded thier vehicles, and ask for a Lean Cheque back so they could invest the Lean Cheque, into something at the time was paying 4-6%.
    insert here 8.0%

    #5 Why is GM Canada’s CEO bringing up Long Term Financing, When they are Still coaching 0% for upto 84 month’s?


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