Why U.S. Dealers Are Buying Canadian Used Cars
The used car market in the U.S. has been booming since the COVID-19 pandemic hit last year, causing a surge in demand and a shortage of supply. With new vehicle production hampered by the global chip shortage, many buyers are turning to pre-owned vehicles as an alternative. This has led to higher prices and lower incentives for both new and used cars.
However, some U.S. dealers have found a way to take advantage of the situation by buying used cars from Canada, where the exchange rate is favorable and the supply is less tight. According to Automotive News Canada, U.S. dealers are buying used vehicles at Canadian auctions, despite the pandemic-induced border restrictions. The Canadian dollar, which closed at US 80.57 cents on Tuesday, is helping U.S. dealers chip away at a supply of used vehicles in Canada already under pressure by the global microchip shortage.
As Ford Authority reported, U.S. car dealers are enjoying record profits as buyers are snapping up both new and used vehicles, often paying full price with few incentives and little inventory currently available. However, with inventories dwindling, dealers are forced to look for vehicles anywhere they can find them. Including, it seems, just over the border to the north.
But what does this mean for consumers? Well, it depends on which side of the border you are on. For Canadian buyers, it means less choice and higher prices for used cars, as well as more competition from U.S. buyers. For U.S. buyers, it means more options and lower prices for used cars, but also some potential drawbacks.
According to Lakeshore Autos, a Michigan-based dealer that advises against buying Canadian vehicles, there are some risks involved in buying a car that was made for and spent its life in Canada. These include:
- Different warranty coverage and service history
- Possible odometer tampering or conversion errors
- Different safety and emission standards
- Possible damage from harsher weather conditions
- Difficulty in reselling or trading in a Canadian vehicle
Therefore, before buying a used car from a U.S. dealer, it is important to check the vehicle history report and ask if the car was originally from Canada. If so, it might be wise to look elsewhere or negotiate a lower price.
So, why are U.S. dealers buying Canadian used cars in the first place? The main reason is the exchange rate, which makes Canadian cars cheaper for U.S. buyers. According to the Bank of Canada, the average exchange rate in 2020 was 1.3415 Canadian dollars per U.S. dollar, meaning that a $20,000 Canadian car would cost only $14,908 U.S. dollars. That’s a significant saving for U.S. dealers, who can then mark up the price and sell it to U.S. buyers.
Another reason is the difference in supply and demand between the two countries. According to Cox Automotive, the U.S. had 2.66 million used vehicles for sale in March 2021, down 26 percent from a year ago. In Canada, the situation was even worse, with only 376,000 used vehicles for sale in March 2021, down 37 percent from a year ago. This means that U.S. dealers have more incentive to look for cars elsewhere, while Canadian dealers have less incentive to sell to U.S. buyers.
However, this trend may not last forever. As the COVID-19 pandemic eases and the chip shortage is resolved, new vehicle production and sales may recover, easing the pressure on the used car market. Moreover, as the Canadian dollar strengthens against the U.S. dollar, the price advantage of Canadian cars may diminish or disappear. Therefore, U.S. dealers may have to find other ways to source used cars in the future.