Long loan terms and more frequent refinancing have led to an increase in Canadian auto loans with negative equity, according to a Moody’s Investors Service report.
Negative equity happens when a consumer owes more on a vehicle than it is worth. This situation can be exacerbated when customers buy new vehicles before completing their original loan terms, causing the equity to “roll over” with them, leaving them in a “trap,” Jason Mercer, a Moody’s vice president and senior analyst, told Auto Finance News.
While vehicle depreciation is a contributor to negative equity, consumer appetite for smaller monthly payments – which necessitates longer loan terms – is a major factor, Canadian auto finance companies told AFN.
“Consumers rarely want to put cash down upon purchase, so they end up financing everything, including the taxes,” said Aaron Dyck, business manager at Rifco National Auto Finance unit Splash Auto Finance. For example, in Alberta, if a dealer sells a $20,000 car, the customer may end up financing $21,000 after tax. This dynamic creates 5% in negative equity “before the customer even leaves the lot,” Dyck said.
Additionally, negative equity can be caused by dealers marketing to recent car buyers. “Ten months after I bought my Jeep, I was getting offers such as, ‘Trade up,’ ‘Trade in,’ ‘Get same payments,’ ‘Get better rates,’” said Darcy Greig, director of special finance at Langley Auto Loans. “It’s marketing back to customers that provides so much negative equity.”
