The Truth About Subprime Customers
If numbers don’t lie, they are telling us that Canadians love their vehicles. The demand for cars in Canada continues to increase as the Canadian automotive industry hit record sales again in 2016, with vehicles sales totaling over 1.95 million vehicle sales. With low interest rates, the availability of longer terms on loans (meaning lower monthly payments), and the reversal of delayed decisions buying a vehicle during the recession, Canadian consumers are filling their driveways and garages.
By The Numbers
- The average Canadian household has 1.5 cars
- The average Canadian household debt has increased to 165%, meaning that for every $1 in disposable income, the household has $1.65 in debt
- Just under 2% of vehicles financed use subprime auto loans
What is Subprime
With a quarter of the cars financed being classified as subprime, it is important to understand this type of consumer. Unfortunately, the word “subprime” became associated with a negative reputation during the recession in 2008, where it was seen in the news on a nightly basis. If you haven’t heard of the term subprime it is also referred to near-prime, non-prime and second-chance lending. A subprime loan has higher interest rates and may have longer payback periods.
Historically, a person who qualified for a subprime loan was defined as having a Beacon Score of below 640, although this can vary. The negative reputation of this type of loan is often mistaken to be negatively associated with the consumer using it to pay for the vehicle as well, but in most cases that’s not true.
Who is the Subprime Consumer
The subprime consumer can be anybody. It can be your boss, your colleague, your best friend, your family member, your next door neighbour. This consumer does not act or dress or look different than the majority of the population in Canada. The period of 2008 to 2011 was a tough time for many Canadians, a time when the global economy was going through a recession. Although, Canada was relatively better off than most countries, many consumers who were above the prime line faced difficulties.
Consumer bankruptcies, divorces and increased layoffs caused missed payments on loans which hurt personal credit scores. At the same time, prime lenders tightened their credit criteria causing greater difficulty for consumers to get loans. This group of consumers who were now classified as subprime still have the same needs as everyone else. Majority of these consumers are employed and need a vehicle to get to work.
They [subprime consumers] still have the same needs as everybody else. They still have a need for an auto loan. They’re employed so they need to get to work. They need as many credit options as other people have. They’ve just found that over time maybe the non-prime lenders were the better option for them based on their score at that time.
Another group of subprime consumers is the younger generation/Millennials. This type of consumer has little-to-no credit history and can be seen as a risk to prime lenders. The majority of this generation is starting to enter the workforce or attend post-secondary education, requiring a vehicle.
A subprime consumer can be anybody. The negative image associated with the term is unfortunate and misleading. Many are starting to realize that consumers with poor credit are not bad people. They may have fallen on hard times, which most of us may face at some point, but they’re trying to move up in their lives.
As a consumer, don’t think a subprime loan as a problem, but as an opportunity. With such a loan, you will be able to purchase the vehicle you need now instead of waiting for your circumstances to improve.