Description: Auto and finance industry executives are voicing misgivings over the move towards long-term car loans of seven or eight years. The big fear: car owners will start returning vehicles prior to the expiry of the loans, creating a dilemma when they try to finance a new vehicle while the original car loan exceeds the value of the trade-in. To pull a term from the home mortgage crisis, these consumers will be effectively “under water”. No wonder this creates some degree of anxiety amid other reports that Canadian consumers are becoming more leveraged.

Source: The Globe and Mail.com

Date: November 19, 2014; updated November 20, 2014

Link: http://www.theglobeandmail.com/report-on-business/long-term-car-loans-a-worrying-trend-for-auto-and-financing-industry/article21662398/

Discussion Points:

1) What is your personal tolerance for debt load? Would you be interested in a car loan of seven or eight years in order to procure a payment you could handle?

2) How would the trends in auto financing impact the calculation of the provision for loan losses?

3) If you were an auditor of an auto company, how would the issues raised in this story affect your assessment of risk?