This document discusses trends in auto loan terms in Canada. It notes that loan terms have increased from typical 24-36 month terms to now regularly being 60-96 months. This is due to rising vehicle prices from a lower Canadian dollar and the need to maintain monthly payments. It has led to more "churn" as customers trade in vehicles before loans are finished to roll over any negative equity. The longer terms transfer more risk to customers from manufacturers, but the industry enables trading in to manage this risk. Record sales show mobility through frequent trades is the new business model, with all parties taking on some risk to sustain the 36 month cycle.

1. Creeping Auto Loans
Strada iQ
March 2016

2. Back in the Day
A 24 or 36 month loan term on a vehicle
was the standard of the industry for many
years. While most folks had equity in the
vehicle they were driving, basically the
vehicle was worth more than the amount
owed.
Situations with negative equity unless a
customer had additional cash to put down,
it was extremely challenging to close such
a deal and find a financial service provider
to fund the deal.
Those were the days of "vehicle
ownership", equity in the trade in, and by
today's standards positively short loan
terms.

3. Fast Forward
In the early years of the 21st Century the
Canadian dollar was in the dumpster
similar to today, most manufacturers had
conveniently raised their prices to
compensate for the lower value of the CDN
dollar.
While CMS (Citizen Main Street) enjoyed
the benefits of leasing which quickly
camouflaged the rise in prices while forcing
manufacturers and captive financial service
providers to have skin in the game by
assuming the residual value risk on a ton of
leased vehicles.

4. The Unthinkable
Suddenly GM is in trouble, Chrysler too,
residual risks on leases are a billion dollar
concern, the value of the CDN dollar is
rising, social media is empowering CMS to
influence manufacturers to lower the prices
of vehicles.
Everyone is very discreet, nobody wants to
talk about it, until Strada, yes...us at Strada
mention that the residual risk is scaring a ton
of folks, while CMS wants to pay a fair
Canadian price for a vehicle.
In the meantime it was "We are out or lets
get out of leasing, lets extend the loan terms,
while disposing of the residual risk on CMS
with finance terms instead of leasing".

5. Marching Towards 96
Here is an industry that functions best on a
36 month cycle, embarked on a mission to
reach a 96 month loan term. For several
years it was a stable voyage with a slow,
steady, inexorably creep towards longer
loan terms.
"We are not leasing, we do not have a
residual risk"
"We do need to run on a 36 month cycle to
stay in business, and make money"
"By now CMS is closing deals on monthly
payments, with a ton of software churning
around in showrooms“

6. Reality Check
A lease is a monthly payment to use a vehicle, its
the same with the extended loan terms, its a
monthly payment to use a vehicle...forget
ownership...its mobility.
Similar to the residual risk being out there, now the
negative equity is out there. The best part is that to
deal with negative equity everyone has to put skin in
the game (manufacturer-dealer-CMS) which
perhaps creates a sense of comfort.
Agreed...some manufacturers never stopped
leasing, and are in a dramatically different position
to deal with their customers.
CMS will shop around as to who will best deal with
the negative equity, and remain at a constant
monthly payment. Although CMS only wants to visit
1.7892 dealers to make a deal, current reality is that
he visits more to package the negative equity.

7. The Pull Ahead
The auto business working best on a 36
month cycle is on a mission to "pull
ahead" abbreviating the finance terms.
Although vehicles are financed for 60-72-
84-96 months. The magical time frame is
the 36 month mark.
Everyone is pulling ahead exploring the
possibility of doing another deal at close
to the same monthly payment.
Obvious that CMS is in an advantageous
position in the pull ahead powered by low
rates.

8. Churning
The pull head strategy generates an
increased level of "churning" in the
showroom.
With deals being more challenging to
close, terms getting longer to compensate
for increased prices and negative equity.
While the monthly payment is inexorably
creeping up.
The old school (by now) mantra that
customers visit less than 2 dealers, not so
much in 2016.

9. Loan Terms
Its almost scary, and makes for a ton of
pundit fodder regarding auto loans.
Prices of new vehicles have escalated
powered by the lower Canadian dollar.
New vehicle inventories are up at
dealers, which creates pressure to move
iron.
To compensate loan terms have
increased in length to uphold (or try) a
constant monthly payment
Chart from JD Power PIN

10. Powered by Data
Many forget that using big data permits
getting closer to a threshold or edge.
What seems scary, becomes normal.
Manufacturers use big data to calibrate
incentives to generate higher sales
results.
Dealers use big data to finely focus the
“pull ahead”.
Financial service providers use data to
calibrate their appetite for risk, and at
times risk sharing.

11. Risk
Pundits want you to believe that the loan risk
rests on CMS. That longer terms, are
supported by longer lasting vehicles. That
CMS is buying more vehicle than needed.
The auto industry in Canada is fully engaged
with the risk of upholding a 36 month cycle.
While abbreviating to initial loan terms.
The risk for the industry is no longer a lease
residual, its evolved to survival.
While CMS has evolved from ownership to
mobility for a monthly payment to replace
the longer term ownership risk.

12. Rolling Over the Risk
CMS with a long term loan cannot afford
the maintenance risk of a vehicle
especially after the warranty expires
during the term of the loan.
The industry call ill afford to let loans run
the length of the term.
The industry enables/empowers CMS to
trade in a vehicle and roll over a risk
(deficiency).
It’s the new mobility business model.

13. Record Sales
Reinforce the fact that mobility is the new
Canadian model. While rolling over the
risk generates higher sales.
The wider choice in financial service
providers has increased sales.
CMS has a limited appetite, and budget
for vehicle maintenance or repairs.
Low interest rates are an additional
contributing factor.
Agreed…new vehicle sales are through
the roof.

14. Advantage
Who has an advantage?
Manufacturers who never abandoned
leasing in Canada, have a clear and
distinct advantage.
Manufacturers who have a strong
certified pre owned program can further
sustain their advantage.
Financial service providers lend the same
money over and over to the same
customer.

15. The Winner
Who wins?
CMS, the customer is the big winner.
CMS is the mobility user.
The auto industry is the mobility provider.
Canada is on the leading edge of the
mobility model.

16. The Wall
Where is the wall?
When are we going to hit the wall?
It’s a moving target making its way further
down the road.
The mobility providers will continue
pushing the wall down the road.
The mobility users will take advantage of
all the options, offers, incentives.
The pundits, analysts will continue trying
to pull the wall back.