Canadian Auto Lending Market

CANADIAN AUTO LENDING MARKET TRENDS

The defi Team defi INSIGHT, Originations

Canadian Auto Lending Market

The Transunion Q1 2022 Industry Insights Report describes a return to pre-pandemic levels for the credit sector, with credit activity surging as the economy has strengthened. Though high inflation and interest rates have caused concern, increased credit participation by consumers saw a rise in originations and balances as credit activity has normalized. Since the first quarter of 2021, the credit market in the country increased 9.2 percent overall, while the Canadian auto lending market rose 3.3 percent. Consumer delinquency rates are still below pre-pandemic levels, though delinquencies for consumer loans increased for the third quarter in a row to .19 percent. However, 56 percent of consumers are concerned by high inflation, with 46 percent cutting back on discretionary spending. This could have a detrimental effect on the Canadian auto lending market.

Canadian Auto Lending Market Trends: Delinquency Rates

Although auto loan delinquency rates are still lower than prior to the pandemic, rising interest rates and recessionary fears indicate the Canadian auto lending market may be in for a rough ride. However, the improvement in supply chains for auto manufacturers is one bright spot for the Canadian auto lending market.

According to Equifax Canada, 0.86 percent of all Canadian auto loans were 90 days past due in Q4 2021. Comparatively, according to Automotive News Canada, the auto loan delinquency rate was 1.08 percent in Q3 2009, at the peak of the Great Recession. At this point, lenders should be cautious and keep an eye on economic indicators.

New Car Loan Terms Extend to 84 Months

Managing this auto debt may be easier due in part to longer loan terms. CBC reports on a J.D. Power, Inc. study indicating more than 50% of new car loans are financed for seven years, an increase over the historical average of five years. Rising interest rates and higher new-car prices may make longer-term loans less attractive, however. This is especially true for first-time buyers and others with greater risk potential. These longer terms put consumers in a negative equity position, which is disadvantageous for lenders when a borrower defaults. With an 84-month loan, risk exposure increases markedly, which may increase delinquencies in the Canadian auto lending market.

Canadian Auto Lending Market: The Expected and The Unique

Looking back at the lending market from a few years ago gives some interesting perspectives for today’s Canadian auto lending market. FICO’s 2018 Consumer Survey of Automotive Finance Perceptions Canada still offers detailed and relevant information about Canadian auto lending market trends for today’s market. It found the following:

  • Generational financing differences: It found those between 58-76 years old preferred financing dealerships. While many middle-aged borrowers prefer banks, there’s a growing market of younger, tech-savvy consumers making digital financing their first choice. Digital financing increased considerably during the pandemic and looks to continue on an upward trend.
  • Vehicle first, financing second: 78 percent of consumers shopped for a vehicle before inquiring about financing.
  • Dealer financing dominates: 70 percent of consumers in 2018 obtained dealership loans. Though only 4 percent of that group stated they would consider online financing, 23 percent indicated they would consider online financing for their next loan. After the pandemic, the proportion of digital financing looks set to increase exponentially.
  • One offer is all that’s needed: 60 percent of consumers indicated they consider only one financial offer before making a decision. That behavior might be attributed to a desire to simplify the purchase process or potentially a lack of knowledge regarding various financing options. However, 89 percent of consumers indicate they obtained a good or excellent deal.
  • Streamline the process: 35 percent of respondents said they would accept or at least consider an instant loan offer if that eliminated dealing with a bank or complex paperwork.

A few themes surface from all these findings. First, consumers were willing to take on additional debt in light of low-interest rates at the time. Generational differences hinted at evolving auto financing trends, particularly when it comes to utilizing mobile devices. Finally, consumers favored speed and simplicity in auto purchasing and financing.

With the Bank of Canada raising interest rates four times so far in 2022, the average interest rate for a consumer loan is now 7.05 percent, which may indicate a coming downturn in the auto lending sector. Meanwhile, trends in digital financing shifted significantly during the pandemic, with consumers of all ages adopting financial technology (fintech) to purchase vehicles. While consumers still favor speed and simplicity when buying and financing a new vehicle, they’re more inclined to start their auto purchase online. To take advantage of these changing Canadian auto lending trends, lenders need to ensure outdated loan origination systems do not inhibit their processes.

Canadian Auto Lending Market: Takeaways for Lenders

What should Canadian auto lenders conclude from these trends? What are the best strategies to maximize current lending opportunities and prepare for coming market changes? Here’s what we think:

  • Integrate with dealer management systems (DMSs): As the majority of consumers continue to seek financing at dealerships, integration with DMSs open lenders to additional sources of lending opportunities.
  • Differentiate with fast responses: There’s no shortage of Canadian lenders, especially in the non-prime space. Canadians prefer a streamlined process for purchase and financing. Integrating with a DMS lets consumers submit loan applications through online portals. Decision rules and auto-structuring enable lenders to quickly evaluate applications, return decisions in seconds, and increase the chance of booking a deal with the first offer.
  • Support mobile devices: Especially after the pandemic moved so many financial interactions online, it’s not just those who grew up with the internet who are doing business via mobile devices. Mobile, paperless, and e-contracts have become essential capabilities for consumers of all ages. It’s necessary now to have digital processes in order to stay competitive and keep processing costs low.
  • Employ analytics: The wealth of processing and portfolio information attains greater value when analyzed to identify process improvements and factors contributing to defaults and delinquencies. Savvy lenders will employ analytics to continually improve process efficiency and reduce risk.

Canadian auto lenders need to evaluate the capabilities of their current loan origination system (LOS). Legacy systems are unlikely to provide the functionality necessary to differentiate them from others in today’s market. Older technology typically adapts inadequately to the inevitable changes in auto financing trends. A cloud-based LOS offers lenders these capabilities, along with lower capital and operational expenditures.

While resulting in faster implementation, configuring this technology gives lenders a wide range of cloud-based lending services to meet their unique processes and practices. Integrating a cloud-based LOS allows lenders to better utilize tools that look at alternative data for approvals, an applicant’s employment, vehicle valuations, and fraud detection. Doing this improves both the quality and speed of lending decisions while also reducing risk.

Despite the leveling of market growth, there’s every reason for auto lenders who use modern loan origination solutions to be optimistic about the Canadian auto lending market.

Getting Started

defi SOLUTIONS offers a total solution for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. From digital engagement through the complete lending process, defi sets new standards for flexibility, configurability, and scalability in originations and servicing (by your experts or ours). defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information regarding the Canadian auto lending market trends, please visit www.defisolutions.com

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