Car market outlook for 2024

Ashleay: Welcome to the “In Your Interest” podcast. My name is Ashleay and this week Sébastien and I are talking with our colleague Brendan Dineen, Vice-President of Sales and Marketing at our subsidiary iA Auto Finance. Our goal today is to learn how to better navigate the road to auto financing. So, hello, Brendan. Hello, Sébastien.

Brendan: Hi!

Sébastien: Hello, Brendan. It's great to have you here. Auto finance is always a very interesting topic to everyone out there. And everyone's always looking for, buying a new car every, what, five years? I don't know, what's the average. Do you have data on the average?

Brendan: Somewhere between 3 to 5, depending on if you can find a car.

Sébastien: Okay. Yeah, if you can find a car. That was one of the issues, the inventory shortages. And also, you know, we're always talking about interest rates here. Not that we're that passionate about interest rates, but we have to talk about that for sure. So, you know, the last few years were bumpy on that run. So how has the auto industry adjusted to inventory, interest rates and everything in between?

Brendan: Yeah, I think for the most part, the industry has done a really good job of going with the flow. So, much like you mentioned, we had a real inventory crunch. So, for the last two years you really couldn't find any inventory which drove up prices of cars, which made it really expensive for someone to buy a new vehicle or a used vehicle. And then on top of that, with interest rates rising, made it really expensive to borrow money for a new vehicle. So, on average, your customers saw about a $200 a month increase to buy a new car in the last couple of years.

Sébastien: Okay, okay. And 2024, is it now a good time to buy a car?

Brendan: I think this is the good news. So even in the short two months we've seen, we've started to see prices come down. We've seen interest rates stabilize, and manufacturers are starting to go back to discounting cars and offering incentives to get you to buy a car. So, we're definitely seeing some light from higher prices and higher interest rates.

Sébastien: Okay.

Ashleay: And what should we know before looking into financing a vehicle?

Brendan: That's a good question. So, I think the best thing to do before financing a new vehicle is to best understand your budget and what you're comfortable to afford. So, typically, a good guideline is 10 to 15% of your net income as a starting point to afford a car payment. And that's just to ensure that there's enough room left over in your budget for your housing expenses and other costs in your life.

Sébastien: That's the first time that I hear this number: 10 to 15% of your net monthly income, that's a good way to frame it. And here you're talking about if you're purchasing a car. Rental, is it the same thing?

Brendan: For, uh, you mean like a lease?

Sébastien: Yeah.

Brendan: Same thing. So, payment, whether it's financing or leasing, it would still be a good standard as far as how much you want to look at spending your budget on.

Sébastien: Yeah. And you know, it’s not just the monthly payments, you know, when you buy a car, there's a lot of other expenses. So, you need to… the 10 to 15% is to adjust for that, right?

Brendan: Correct. The 15%, you'd like to think that would include your maintenance, your repairs, your fuel costs, anything to do with car insurance, your overall cost of ownership, for sure, whether financing or leasing.

Ashleay: Wow! I really like that! Thank you for that! Very interesting! And what do you do if the monthly payment is too high? Let's say you're kind of looking into it. Are there ways to reduce it?

Brendan: For sure. There's always options to bring your car payment down. The best one, of course, is to negotiate a lower price. So, we have seen inventory returning and some deals from manufacturers. So, you’ll start to see dealers around the country starting to be more willing to talk about the price of the car. So, if you can negotiate a lower price for the car, that'll help you save money on your monthly payments, for sure.

Sébastien: Okay. So, the down payment can be a part of the equation too?

Brendan: For sure. If you're in the position to have a down payment, maybe you’ve saved some money for the last few years. If you want to invest that into the car, that will reduce your monthly payment as well as the amount financed and, overall, your borrowing costs through the terms of the loan.

Sébastien: Okay. And we're seeing a lot of like, you can have a long-term loan–84 and 96 months. Is this a good thing?

Brendan: I don't think it's a bad thing. So, typically, in today's world, 84 months is quite standard these days, you'll see 96 sometimes. Even leasing used to be typically 36 to 48. Now you're seeing leasing at 60 months. Since cars have gone up in price, they also have gotten better in quality. So, they do tend to last longer. So, to have a longer finance term that keeps your payment low doesn't seem to be a real issue long term.

Ashleay: And I’m assuming you should shop around. Here, you're talking to the queen of shopping around, so…

Brendan: It's a great idea and obviously there are lots of places to do that. You can go out and visit your local dealer. I would, like most people, start online and just start seeing what's available from different manufacturers. If you're willing to shop around a bit, you can still find a good deal.

Sébastien: Yeah, and pre-pandemic buying a used car used to be a good way to save money. But since the inventories were so low, the price of a used car was more or less in line with that of a new car. So how does that look now?

Brendan: It's getting a little bit better. So used car prices are slowly coming back to pre-pandemic levels, let's call it. Not as quick as new cars – where we're seeing lots of discounts and incentives by manufacturers at the moment – but definitely if you take some time and look around, you can find a nearly used car that can help you save money and still offer the performance and the features of a new car.

Sébastien: Okay

Ashleay: And is anything related to credit score? Can we change something about that to…

Brendan: For sure. It depends on your credit score, if you're familiar with credit scores. So, a credit score is an indicator of your credit history. So, typically a credit score operates on a range from 300 to 900, 900 being a perfect credit score. And anything above 650/660 or sorry, below 650/660 needing a little bit of improvement, but the real difference is the higher your credit score, the better the interest rate or the deal that you can get. So, if you're above that, say 660/700 credit score range, you can typically qualify for the 0% financing or the 2.99, whatever the best financing deals are, and that keeps your payments as low as possible.

Sébastien: So it's good to enter the process knowing what your credit score is, I suppose.

Brendan: I'd recommend it. Much like going in to buy a house, it makes a lot more sense to find out what you can afford before you start to shop. That way you don't get too excited when you're at the dealership and get yourself into something that looks great, but becomes a problem later on.

Sébastien: Yeah, and how can you know your credit score?

Brendan: A good question. So, there's quite a few ways you can find your credit score today. In Canada there's two main credit bureaus. These are companies that gather information from anywhere that you have a loan or a credit card with and report the history of it, that that makes up your credit score and they’re Equifax and TransUnion Canada. You can find them online and they'll give you your credit score for free. And what's also somewhat new in the last few years is a lot of the Canadian banks now offer access to your credit score in your online banking. So, the next time you're on your online banking account, take a quick look down the side and see if it says check your credit score here. It's a great way to check it as well.

Ashleay: Very cool. And the complexities of a credit score can feel like driving through a dense fog, shall we say. Do you have any suggestions or explanations about what the credit score is?

Brendan: If you're not familiar with them, it sounds really complicated. It's not too bad, though, really. The higher the score, the better. The lower the score, you need to work on it a little bit. So, typically a credit score is made up of a few different things that you borrow money for. So, car loans, credit cards, line of credits, mortgages. So, depending on the balances of your loan and how you pay them back, it will impact your credit score. One thing I like to talk about is people are more familiar with car insurance rates. Car insurance and credit scores work quite similarly. So, if you have a really great driving record, you have nice low insurance rates. If you get a speeding ticket or two, what happens is your rates go up a little bit. Credit's the same. So, if you miss a payment or two, it's kind of like a speeding ticket, your rates go up a little bit. If you have an unfortunate collision or something bad in car insurance, everybody knows their car insurance rate is going to go up quite a bit higher for a few years until you improve your driving record. Credit’s the same. If you have, happen to write off an account or have an unfortunate event like that, your rates will be higher for a time until you improve your history and then they can come back down. So, credit score is something that's always moving and fluctuating. And it's more of a marathon than a sprint so to speak.

Sébastien: Yeah. And you know, in the past, I've worked for a banking institution, and I was doing some of the models for credit scoring. And the way that it works is that they have data on millions of borrowers, and they look at those that did default on their loans through history. And they look at what the data looked like at this moment for the total quantity of loans that they had or anything that is linked to your behaviour as a borrower. And then they can correlate your own data now to what these people looked like then. So then, you know, if you look more like someone who defaulted in the past, then you will have a lower credit score. And the reverse is true if your data doesn't look like someone who's about to default. So, there’s all of these models that can be proprietary for banks, but also Equifax and TransUnion that you mentioned here are two of those services, the credit bureaus in Canada. So everyone has a credit score. Even if you don’t know it, you are scored on your credit today while you’re listening to this podcast.

Brendan: That’s very true.

Ashleay: And can I get a car loan even if I have a low credit score?

Brendan: For sure. So, if you do happen to have a lower credit score, it’s not the end of your ability to borrow money. It just changes the cost that you’ll pay to borrow the money. So, for sure, if you do have a lower credit score or if you're not even sure, the best thing I would suggest is to go to a car dealership and talk to them. Every car dealership has finance professionals inside the dealership. They do this every day. They can do a pre-approval with you or get pre-qualified like we mentioned before, and they can show you your options and what your cost of funds will be for that car over a few years. And if you're worried about that, I wouldn't be too worried. Like, if you do focus on rebuilding your credit score, you can trade the car in in a few years and improve your interest rate and your monthly payment ultimately.

Ashleay : Absolutely. Okay, that’s very cool. And do you have any tips for first time buyers who are looking to finance a car?

Brendan: For sure. So, if you're a brand new to car financing, I think the best thing to do, again, is to start with a pre-approval and just find out exactly what you can qualify for. So, you can use that 10 to 15% as a guide for what your monthly payment might be. But again, if you talk to the dealership, they can submit your information to a lending institution, and they will tell you the amount of finance that you're approved for, your interest rate in the term. And then, from there, go shopping and make sure the car fits your needs and your financing.

Ashleay : And is it true that we can negotiate the terms?

Brendan: You definitely can negotiate the terms. That said, most dealers will show you probably the longest term they have just to make the car payment look as affordable as possible. So, it might sound counterintuitive, but you might want to actually consider going with the lower term if it fits your budget. And that way you can pay off the car a little bit quicker and save money on interest.

Ashleay : Right! And research the car's value, I'm assuming, as well, especially if you're buying something used.

Brendan: That's a great idea. So, for new or used, it's a great idea to spend a little bit of time, if not a lot of time on the internet, trying to see or looking at what different values are. A lot of the used car retailers online today actually show you a guide to see if you're getting a good deal or not such a good deal or maybe why a lower km car costs more than a higher km car. So for sure, some time invested in research will save you money along the way.

Sébastien: And yeah, we often read about it's always important to read the fine print. I know that I don't.

Ashleay: I know, I was gonna say, I'm sure I'm not the only one. Thank you, Sébastien.

Sébastien: No, no, no. But, you know, is it really worth it to read all of that?

Brendan: Being from a finance institution, I definitely say yes. If you invest a few minutes to read the fine print, at least you’ll understand what you’re agreeing to. Whether there’s fees down the road or if you miss a payment, what happens? On that subject, if you do happen to miss a payment, what most people don’t think about is contacting your lender. So, if you ever find yourself in that situation, call the lender. Our job is to try to help you make sure that you're on time with your payments and stay in the car. And a lot of times, the small print on the contract really has to do with what happens if things aren't going well. So read the contract, make sure you know what you're doing. It only takes a few minutes and then move on.

Sébastien: Yeah, and if you want to preserve your credit score, making your payments on time is a big part of that equation.

Ashleay : And with the arrival of electric cars, should we shop around differently?

Brendan: I think with the arrival of electric cars, it takes more research. So, before you run out and buy an electric car, the big advice that really the industry is suggesting is make sure you know what your needs are for. So, make sure you understand how far you drive and how long it takes to charge the car. So, if you’re someone that wants to pull a boat or a trailer on the weekends, you need to make sure you find an electric car that can handle the weight load of that. But for most people that are just driving to and from work, electric car is a great option. The big advice there is to look at the full ownership costs, so there can be significant savings with charging your car versus putting fuel in it. It's just making sure you have the whole picture of the financial cost. And then, depending on where you are in the country, there is government rebates that you can qualify for depending on the vehicle, whether there's a federal rebate or a provincial one that can impact the price of the car as well. So, take your time, read about it on the internet and again talk to the dealer. They really become experts at asking the right questions and understanding how to match an electric car with your specific needs.

Sébastien: Yeah. Good advice.

Ashleay: Yeah. Very good. So last quick question: if we talk about the Tesla-style direct distribution model, is it possible that this is going to become the industry standard from now on?

Brendan: It's definitely the hot topic in our industry today. So, Tesla's definitely come out with a product that's in high demand. So, the direct model works there because people are lining up to get a Tesla. The other manufacturers have noticed this and are trying to understand what’s best for the consumer. So, we definitely see genesis of the world. There's some new entrants from different countries like VinFast that are doing a direct model. And I think whether you look at it as a Tesla model or not, most manufacturers have a way for you to buy a car online today. So, if you take the time to see what works best for you ultimately, if the direct model wins out or the current retail model, I think is mostly whatever the better car experience is for you. Ultimately, the manufacturer wants to make it as easy as possible for you to come and buy a car from them, and that’s the model that’s going to win out long term.

Ashleay: Very cool. Thank you so much. This concludes our podcast for today. Thank you both for being with us. And to first time car buyers, we hope that you learned a few tricks to make your first purchase a smooth journey. And to everyone else, we hope that you learned a little bit more on auto finance and we will see you next week. Loved this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms, visit the economic news page on ia.ca or follow us on social media.