Last Friday's chronicle on auto loans attracted a lot of attention. So much so that I have been invited to discuss auto financing at radio shows.
Last week, I reported on the content of a recent report by the Financial Consumer Agency of Canada (FCAC) on various practices in the auto financing industry.
I emphasized the phenomenon at the center of the document published by the federal agency, the growing popularity of long-term auto loans (72, 84 and 96 months), its origins and its adverse effects, including the excessive indebtedness of consumers.
In one of my radio interventions, the presenter stated in the preamble that the title of the column was "a bit exaggerated" (The long-term auto loan scandal). He put a lot of emphasis on consumer responsibility. I felt that he wanted to spare the car dealerships, yet referred to in the report for their questionable practices. I deduced that they were important advertisers.
Our interview nevertheless raised this question: whose fault is it? The environment or the individual? The car dealership and lenders seeking to satisfy their interests where the consumer, credulous and misinformed, who favors short-term gratification rather than his long-term interest?
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The debate is interesting because it raises the issue of individual responsibility and regulatory constraints. Should we tighten the screw to industry or encourage people to educate themselves? Or both.
Éric Brassard, the author of the book Finance driving, wrote me to tell me that I was tackling the wrong target, in this case the long-term loan and car debt.
The problem, says the financial planner, lies in the fact that people buy cars that are too expensive for their means and do not keep them for long enough. He is right.
Because for a savvy consumer, the long-term loan is a good deal, he says. Indeed, the buyer does not have the advantage to pay his car as quickly as possible. The interest is ridiculous, he recalls, and the main cost of the car, its depreciation, must be assumed whether or not you hurry to repay the loan of your vehicle.
According to Éric Brassard, it is more advantageous to extend the term of the loan, because it allows to release money that can be invested elsewhere, in the RRSP, for example, which will give the right to tax deductions and which will provide returns higher than the interest paid on the car loan.
This strategy works if you buy a car in your means and if you keep it for a long time.
In jargon, this is called the "opportunity cost". If you allocate your financial resources to accelerated repayment of your car loan, or by paying the car cash, you miss the opportunity to make investment gains that exceed the cost of your loan. For the same reason, we advise you to invest rather than rush the repayment of your mortgage.
But that's the theory. At the dealership, the buyer hears the representative telling him that he can afford a sedan instead of an economy car for the same or almost the same monthly payments, if he agrees to repay his loan in seven years instead four.
I do not think the seller explains what the opportunity cost is. He is not a financial advisor, his job is to sell a car to his client, to make him dream a little, not to present him with financial planning.
There is no malice, he does his job. So he's selling the 17-inch wheels, the chrome flourishes, the Hi-Fi chain and the leather seats. "Ben more comfortable!" It reminds me of Sébastien Pilote's film, Seller, in which the endearing character of Gilbert Sicotte convinces a lockout worker to buy a big van. The transaction will turn drama, but it is not the result of a bad intention of the seller. It is in the nature of the latter to push a little. Otherwise, he would do another job.
FCAC's report raises a troubling point, which I pointed out in my last column, but which I did not extend. The dealer acts as an intermediary between the lender and the buyer. As such, he collects financial information about the client, such as his salary, the cost of his housing, etc. He enters this information into a system to obtain submissions from multiple lenders to finance the transaction.
The customer is unaware of the existence of these bids, he will be presented only one, selected by the dealer. The latter is paid by the lender, and both have an interest in promoting the sale of a more expensive vehicle.
The result is that the auto industry is doing well right now. On the other hand, car debt is the fastest growing in recent years, more than mortgages, which is saying a lot.
I do believe that much of the responsibility lies with the customer. But this system of financing gives an advantage, a small "edge" as the said, the lender and the seller.
And yes, there are certainly some screws to tighten.
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