A new trend among those who earn relatively good and stable income has emerged, as many Canadians are borrowing more for the purchase of vehicles. Car loan amortization periods of up to 96 months are now available, and consumers are taking advantage of this, despite already being heavily indebted with student loans, home mortgages, or other obligations.
One credit rating agency has warned of a possible bubble in car loans since some of the financing schemes result in car buyers borrowing up to 135% of the actual price of the car. This was the same behaviour that became prevalent in the market for mortgages in U.S., which eventually led to the financial collapse in 2008.
On the other hand, banks are having a field day handing out car loans. Since 2007, this business segment has grown at a compounded rate of 20%.
This simmering bubble in the market for car loans has compelled Moody’s Investors Service, a credit rating agency, to warn banks of the risks in lending more money at stretched payment periods to Canadians. “If the economy takes a turn for the worse, we could see these loans becoming problematic for the banks,” noted Moody’s vice-president, Jason Mercer.
Moody’s warning is similar to the calls made by the Bank of Montreal earlier as it raised its concerns on the prolonged loan periods. For more details please read this article in the Financial Post.