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When Banks can’t Win Mortgage Wars, they Turn to Cars

Banks have been struggling to win the mortgage wars for nearly a year now. But since mortgage rules have been tightened for the fourth time in just as many years, banks have been finding that no one’s going to be declared the winner. With fewer buyers on the market, it doesn’t really matter how low rates go, as there are few interested. Never being businesses to give up though, banks have now looked elsewhere for those profits – car dealerships.

The deals come in a package known as “floor plan financing,” and it’s a strategy that allows car dealership owners to take out a loan so that they can stock their parking lots and showrooms with all of those new cars always lined up in them.

“The floor plan financing market has become increasingly competitive,” says Richard Goyder, vice-president of personal lending at RBC. “We’ve seen some very aggressive rates out there.”

And it’s little wonder why. Not only does offering rock-bottom rates on these loans give banks some extra profit at a time when it’s dried up in other areas, but it also lets them build and expand their business – at exponential rates sometimes. TD became much more massive after they acquired Chrysler Financial in 2011; and after Royal Bank purchased Ally Financial, their business too has seen a huge boost.

But a slow housing market is just one reason for these new floor plan wars – there’s also been a huge boost in the number of people buying new cars. After delaying plans to buy a new vehicle for several years throughout the recession, people are now ready once again to take on that commitment. That has them out shopping, and car dealers wanting to draw them in with those shiny, new vehicles. And of course, banks are there, waiting too to get their opportunity.

But how long can this last?

Mr. Goyder says that it will last for a little while longer, as banks continue to find areas where growth is still possible; but that rates like these aren’t going to be sustainable forever.

“It’s one of the few asset sectors which is growing,” he says. “We know the housing market is declining, and auto is absolutely somewhere where there is still some growth.

Prices at those levels is probably not sustainable in the long-term. The banks who are engaged in that kind of activity are doing it in an attempt to grab some market share.”

But don’t be surprised if these auto dealership wars go on longer than the mortgage wars did. Unlike mortgage, the federal government has little influence on the auto market, as they aren’t directly a part of it, as they are with mortgages and CMHC.

Last month, Finance Minister Jim Flaherty reiterated this point by saying, “We don’t insure car loans.”

And thank goodness for that, Mr. Flaherty. Thank goodness for that.

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