More consumers are struggling with debt and higher interest rates. There are still ways to help them find the credit they need.
In the automotive industry we know that shift happens.
Our economy is skidding into uncertain times and many Canadian consumers are feeling the brunt of that on their credit scores, creating a demographic that is becoming impossible for auto dealerships to ignore.
The MNP Consumer Debt Index presents a startling picture revealing that 47 per cent of Canadians are on the brink of insolvency with barely a $200 buffer1, before they are not bringing in enough income to cover their monthly expenses.
We know that with interest rates and the cost of living going up, without wages increasing at the same rate we are going to get into the situation where people are not only using up that $200 buffer but for many, it’s much more. Based on these numbers it’s easy to predict the impact this will have on the rate of insolvency for Canadian consumers.
In fact, the report Insolvency Statistics in Canada from January 2023 reports that the total number of insolvencies (bankruptcies and proposals) in Canada increased by 13.5 per cent in January 2023 compared to the previous month. Even more dramatic is that the total number of insolvencies in January 2023 was 33.7 per cent higher than the same month one year earlier2.
This is also putting pressure on lenders as not only is the continuing climb of the Bank of Canada rate being reflected on their rate sheets but as customers are increasingly unable to make their payments, bad loans are driving their profits down. This creates a challenge for lenders who need to tighten up their buying practices in a way that keeps their delinquency rate in check while maintaining enough market share.
To solve this we see the emergence of special programs.
There was a time when non-prime payments were capped regardless of what you debt serviced for. Now we are seeing lenders in the non-prime space remove those caps to allow higher payments if the customer qualifies based on income.
Where we used to see a cap on aged units those caps are softening as well. We’re even starting to see extended term contracts of 96 months being introduced.
No one has a crystal ball, but it seems predictable that with the cost of borrowing going up for the lenders along with delinquency rates that we might see some lenders leaving the market. Does that mean that dealers also should hesitate to invest in this growing segment of the market? Not at all! In fact there’s no better time to embrace the non-prime customer.
With the emergence of free-online tools customers have never been more informed on their creditworthiness than they are now. Eastern Canada Sales Manager for Rifco, Greg Morissette comments “to the non-prime consumer, rate really isn’t a factor that stops them from buying. It’s the payment that really is the biggest factor involved.”
Additionally, online pre-qualification tools coming to market are not only setting rate expectations for the consumer but also starting to normalize a credit first journey.
As the market continues to shift, dealerships simply can’t afford to overlook the potential revenue and customer loyalty that non-prime customers represent. Although changing or introducing processes is never easy, Morissette says that if you’ve got the right pillars in place now is a great time to venture into non-prime.
Each non-prime pillar is equally important for a successful department. He explains, you have to have the right inventory in stock to fit both a non-prime advance and payment. You have to have someone who is skilled at non-prime lending.
Selling to a prime customer and selling finance to a non-prime customer require different skills. You have to have the right lenders in place and you have to understand their programs.
This list might sound over simplified but the good news is that there are resources available to set you up for success.
Lender reps want the business and will help with training on their programs. Just as there are trainers ready to help your F&I team with product presentations, there are also resources available to guide you on credit bureau assessments and the intricacies of non-prime processes.
The non-prime narrative is evolving and it’s time we do too.