Navigating the Auto Delinquency Wave

Loan defaults are climbing and they’re impacting dealers

While mortgage affordability continues to dominate the headlines in Canada, another issue is starting to have a real impact on dealerships: auto loan delinquencies have been climbing.

At the same time, lenders are tightening their credit criteria. The result is that finance managers are having to work harder to get deals approved and keep them performing.

The reality is that this isn’t just a lender problem. It affects dealerships as well. When lenders become more cautious, approval rates tighten, credit limits reduce and dealerships become more exposed to chargebacks on F&I products. It isn’t just about getting deals funded anymore. It’s about getting the right deals funded.

Structuring deals for today’s environment

One thing I don’t think has changed is what lenders ultimately want. They still want to lend. What has changed is how closely they’re looking at long-term loan performance. That means deal quality matters more than it did even a few years ago.

For dealerships, that means taking a little more time upfront. Complete applications. Strong supporting documentation where requested. Making sure the financing structure genuinely fits the customer’s circumstances. Those things have always mattered. Today’s lending environment simply puts a much bigger spotlight on them, particularly for near-prime and subprime deals.

It’s also about understanding how lenders are looking at risk today. Credit appetite changes over time, and staying close to those changes helps F&I managers structure deals that are more likely to be approved the first time.

The objective isn’t simply getting an approval today. It’s putting the customer into financing at the right interest rate with payments that are affordable and more likely to perform over the long term. That’s better for the customer, better for the lender and ultimately better for the dealership.

“Higher living costs have reduced financial resilience for many households, including customers who may previously have managed credit without difficulty.” 

– Nick Cherry

Protecting dealership profitability from chargebacks

Chargebacks are another area that deserves more attention. When a loan defaults early or a deal unwinds shortly after funding, dealerships can lose revenue from vehicle service contracts, GAP products and other ancillary products. In today’s environment, those losses become harder to absorb.

The best way to reduce that risk is before the customer leaves the dealership through proper documentation, realistic payment structures and making sure customers understand exactly what they’re agreeing to. None of those things guarantee a perfect outcome, but they do improve the quality of the deal.

That’s really what risk management is about. It’s not about saying no to more customers. It’s about giving every financed deal the best opportunity to perform.

What rising delinquencies mean for dealers

The other thing we’re seeing is that financial pressure is becoming broader. Historically, higher risk was associated with a fairly specific customer profile. That’s changing. Higher living costs have reduced financial resilience for many households, including customers who may previously have managed credit without difficulty.

That doesn’t mean every customer represents a higher risk. It does mean dealerships shouldn’t rely on yesterday’s assumptions.

Local conditions matter as well. Employment, housing costs and regional economic activity vary across Canada. Those factors influence how consumers perform over the life of an auto loan. Keeping an eye on what’s happening in your own market is just as important as following the national headlines.

Communication matters more than ever

One thing dealerships can always control is the customer experience. Financing conversations are becoming more detailed. Customers may be asked for additional documentation or offered different lending options than they expected. Reduced credit limits and higher interest rates may also impact the choice of vehicle available.

Customers are more likely to stay engaged when they understand why additional information is needed or why one financing option is a better fit. Transparency won’t change every lending decision. It will improve how customers experience the process.

The lending environment will continue to evolve. That’s part of the industry. The goal has never been to approve every deal. The goal is to approve the right deal for the customer, the lender and the dealership. That has always been good lending, but in today’s market, it’s simply become more important than ever.

Bio: Nick Cherry is Divisional CEO of Ardent Credit Services and Phillips & Cohen Associates, where he leads the group’s core debt servicing businesses. With nearly 30 years of experience in financial services, he works with major financial institutions across automotive, banking, utilities, telecommunications and government.