Louise Haines of Creditplus asks the question: is it risk or sales in charge when it comes to subprime lending as liquidity returns to the UK motor finance market?
With increasing numbers of non-prime lenders in the market, payday loans and logbook loan companies find themselves in an increasingly competitive market with a range of companies all vying for a small share.
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This year has also seen key prime lenders such as Barclays, Santander and Black Horse all reduce their risk profiles to capture more market share, making the non-prime lenders look at underwriting even deeper to accrue business due to their cost of funds.
Creditplus has seen an 18% increase in non-prime lending this year mainly due to lenders reducing their risk profiles and accepting more customers at high risk. However we’re still not quite back to pre-credit crunch lending of 2005 to 2007
Liquidity has clearly returned to the marketplace, with the UK job market showing improved figures that are likely to have helped.
The real issues that Creditplus will face going forward will be the affordability aspect and the attitude to pay for non-prime customers.
The past four years have seen non-prime lenders achieve better performance from bad debt and delinquency rates as money was harder to borrow, so the key going forward as times improve is the job stability and income stability of customers, combined with their attitude to wanting to pay their loan commitments.
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By GlobalDataOver the years there has been a great deal of concern expressed around the rising levels of overall consumer debt. There is now a highly competitive lending market in Britain offering a wide range of loans. High street lenders typically use a fairly rigid credit scoring system to select only those customers who have low risks of default, excluding those customers who don’t meet the criteria but may still want that vital loan.
With a large portion of customers falling into the subprime market it was no surprise to see lenders targeting their products to sub-prime borrowers.
The Office of Fair Trading has provided a definition of the kind of borrower who will be using the subprime market: "Those with impaired or low credit ratings and who would find it difficult generally to obtain finance from traditional sources on normal terms and conditions."
The bad debt reached a high level for certain non-prime lenders in 2009 and 2010 as they made the decision to reduce their risk profile in return for more business written. However, the credit crunch forced consumers to look after their loans better and most non-prime lenders are currently seeing less than a 6% bad debt performance of their loan books.
Here at Creditplus we actually found that our lending book performs better with our subprime customers as they tend to stick to their loan agreements, resulting in fewer customers defaulting.
In 2009 and 2010 for some non-prime and subprime lenders their historical bad debt jumped to 11 to 13%. However 2012 and 2013 bad debt on non-prime loan books is now at a much more manageable 4 to 6.5%. This has had a positive impact on us at Creditplus as it means we have more money to then lend out again.
Key considerations
Job viability and security are two major factors that we take into consideration when looking at our subprime customers. Careful consideration is given to the following areas:
1. Whether the customer is going to be employed for the duration of the term of the loan or whether there is a strong possibility they could be made redundant
2. Whether the company is going to exist or is there a strong chance it could go into liquidation
If the answer to any of the above is ‘yes’ the chance of us lending is very slim.
