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Interest-free car loans for all! (And for auto makers and banks, pain)

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How's this for a deal: Hyundai Auto Canada Corp. and Nissan Canada Corp now offer seven-year, interest-free loans to buyers of select models of their cars. Toyota Canada Inc. has also joined the party by waving six year interest free loans to prospective buyers. Canadian auto manufacturers are offering financial incentives whose sheer magnitude raises troubling questions about the real health of the Canadian consumer, as well as the possible desperation for yield by the domestic banks.

These incentives are so steep, it's difficult to see how the companies can turn much of a profit, yet the competitive nature of the Canadian auto industry explains some of the apparent desperation. Toyota is attempting to reverse a 13-per-cent year-over-year slide in sales and Hyundai is looking to regain market share after seeing their sales fall 3.7 per cent. Nissan, at the tail end of its product cycle (ie. not much new to offer) has seen sales fall 16 per cent.

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The famously debt-laden Canadian consumer may also play a role, however. Already strapped with record debt relative to disposable income, Canadians need more and more favourable loan terms in order to add to their liabilities.

Royal Bank's recent purchase of Ally Financial Inc.'s Canadian auto finance business also suggests a financial angle to the aggressive financing of new auto purchases. With the mortgage business peaking, and net interest margins generally crimped by a flatter yield curve, the domestic banks have been searching for unconventional business opportunities to maintain profitability. In 2012, auto loan and credit card debt securitization – an increasingly important source of financing for the banks – increased by $2.5-billion.

It's admittedly speculation, but also not difficult to conclude that slower sales for some auto makers and the search for new profit centres by major banks has combined to create a virtual utopia for Canadian car buyers.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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