Automotive News Canada - July 2017 - v2 - 21

* JULY 2017

( C R E D I T: I S T O C K )

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Lease penetration as a %
of total retail sales

penetration revives, said Simons of
RBC. The longest terms have been
in the 84-96 month range for the last
few years, he said.

NEGATIVE EQUITY

20
2012

2013

2014

SSource:
O U R C JD
E : Power
J.D. POWER

meaning that dealerships had to
handle penalties, as well as wearand-tear fees.
He sees 25-30 per cent as a
healthy lease penetration for the
customer, the dealership and a
lease company.
Through the middle of June,
the lease penetration in Canada
was 26.8 per cent, according to J.D.
Power. It has grown steadily over
the past few years. In 2014, it was
23.1 per cent.
"That's a very significant increase
from where we were post-crisis when
[leasing effectively] went away," said
Teslyk. "It has already helped moderate the growth and lengthening of
loan terms further."
Most lease transactions are in
Toronto, Vancouver and Montreal,
according to J.D. Power.
Of the captives, Toyota Credit
Canada does the most leasing in
Canada, making up 62 per cent of its
portfolio. Honda Finance's business
is 48 per cent lease. Hyundai has 14
per cent. FCA has two per cent. GM
Financial has 25 per cent.

STRETCHING LOAN TERMS
Aside from providing an opening for banks, the decline of leasing helped contribute to longer loan
terms. Even though many captives
stopped leasing, consumers still
wanted a low monthly payment.
"So with the departure and
shrinking of the lease market
came the emergence of ... the longer amortization loan," stretching
the loan term 72, 84 or 96 months,
Teslyk said. Pre-crisis, the average
loan term was in the 60s, he said.
Now Canada's average loan term
has stretched to 75 months, said
Mike Buckingham, senior director
of the automotive finance practice

Still, with terms as long as 96
months, some experts say there is
cause for concern.
Ninety-six-month loan terms
2015
2016
2017
leave the customer with too much
negative equity for too long, said
Bird, which is one reason leasing
has grown in the last few years.
at J.D. Power.
Through mid-June, nearly 29
"Banks are competing for that
per cent of trade-ins had negative
business and trying to aid affordequity. The average negative equiability, so they stretch the loan
ty amount was $6,983. Both the perterm," he said.
centage of trade-ins with negative
Loans of 84 and 96 months are
equity and the amount of negative
also common, driven by market
equity has risen consistently since
competition with incentive pro2012, according to J.D. Power.
grams. Those incentives
"A lot of consumers like to
sometimes prompt consumget a new vehicle every three
ers who don't necessarily
to four years," Bird said.
need a long-term loan to take
"Long-term loans were someone anyway.
thing that was created to fill
"They could support a
the gap in the mid-2000s," he
48- or 60-month car loan, but
said.
the programs are on certain
Buckingham added that
terms, categories, vehicles,
Buckingham: customers might be in for a
that cause people that have
greater financial means ... to Beware nega- rude awakening "when customers who typically trade in
tive equity.
be involved in those longer
their vehicle in about three
amortization loans," Teslyk
years realize they have high levels
said.
of negative equity," he said.
"Cash buyers are as much attractBut overall, Bird said, lenders
ed to that segment as are people who
are very sophisticated: "They make
need a slightly longer term to be
decisions based on experience and
more affordable or to act as a proxy
good data."
for a lease-type solution," he said.
"I don't see any doom or gloom
Loan terms probably won't
with respect to lendextend out much further as lease
ers based on current behavior.
They are actually managing it
very well."
Lenders
are also taking a fresh
look at nonprime. In
the last five
to 10 years,
the industry
has dissected
the nonprime
business, which
accounts
KEVIN TESLYK
Senior vice-president for
automotive finance, Scotiabank

Leasing ultimately dried up
during the financial crisis.
The captives were either
not there or less able to
offer it to the same extent
that they had.

Lease penetration
year- to-date through June 9
AUTOMAKER

Fiat-Chrysler

General Motors

Ford Motor Co.

Hyundai Motor Co.

Toyota Motor Corp.

Honda Motor Corp.

SOURCE: J.D. POWER
AND THE AUTOMAKERS

for about a third of the total auto
finance market, more than ever.
Scotiabank has a division, Scotia
Dealer Advantage, that originates
only nonprime loans to help consumers establish or re-establish
their credit, aiming to elevate them
to the prime segment. And GM
Financial focuses only on leasing
and nonprime lending in Canada.
General Motors has relationships
with a few banks to finance prime
consumers.

HEALTHY OUTLOOK
Overall, the outlook for the
Canadian auto-finance market is
positive. Lenders are being prudent
and paying more attention to residuals, and the lender mix continues
to balance out.
The market's strength might
in part derive from new leadership at some of the top banks: RBC,
Scotiabank, TD Auto Finance and
BMO, Bird said.
Several years ago, the heads of
the banks' auto lending divisions
were tenured. Today, most leaders
came from other areas of the bank
and have been in the auto finance
world for only a few years, "which
is driving some new blood and
enthusiasm into the business," said
Bird.
He expects the Canadian auto-finance space to be fundamentally
healthy.
"Sometimes the rules of the
game change and the competitive
marketplace changes," he said.
"But folks adapt." - ANC

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