7 minute read
Second Lead
Near-prime loans on the rise
Designed for those with less-than-perfect credit credentials, near-prime lending fills a growing need.
BY ERIC FRYKBERG
Practically everyone has to borrow money at some stage in their lives.
For some, however, a health scare, relationship breakup or business failing can make them an unwelcome presence in the bank manager’s office.
Even a few missed bill payments due to absent-mindedness can incur a bank manager's lingering frown, long after the bill-payer has reformed and made a point of paying attention to daily financial obligations.
Add to that the recently introduced Credit Contracts and Consumer Finance Act (CCCFA), which makes it harder for people to get a home loan from a mainstream lender: deep dives into applicants’ expenses have seen loans declined, because too much was spent on coffees or going to the gym.
The result of it all? A section of society which fails to meet the stringent requirements for a regular loan.
For clients with less-than-perfect credit credentials
The non-bank sector has long recognised that there’s a market in lending money to these people, and it set out to serve them with what are commonly known as ‘near-prime loans’. Designed for those with less-than-perfect credit credentials, these loans have a role in New Zealand – a role that is growing.
Estimates put the current, nonbank market share at around 4.5% - a proportion which, according to some industry experts, may triple in coming years.
Sue Griffiths, head of sales for finance company Bluestone, serves many nearprime customers.
She says their financial backgrounds are often complex, with bank statements showing payments from a variety of sources. There is often a mixed history of full-time and part-time work, for example, topped up by money from benefit payments or from Working for Families.
“They often have multiple incomes, or different sources of income, and sometimes the [mainstream] banks don't like that kind of thing.”
Self-employed people can encounter the same problem, Griffiths adds. They often have variable earnings, coming in fits and starts, and factors like the Covid-19 lockdowns gave a distorted picture of their real, long-term income.
“We’ve been seeing a lot more nearprime loans starting to come through in the last six months, and a lot of that has been on the back of self-employed businesses which don't have the full financials.
“We think near prime will grow massively. There is a lot of credit tightening going on with the main banks, and that’s a great opportunity for nonbank lenders.”.
Massive need for alternative loans
Pepper Money sales manager Michelle Sargeant says near prime is a huge part of their business.
“When we first thought about coming to New Zealand, we looked at the market and saw a massive need for clients who don't fit in prime.
“If you look at our product range, near prime is our biggest product at 70%.”
Non-banks tend to price their loans on a risk-assessment basis; while they can be more costly than a mainstream bank, in some cases they can also be cheaper. For instance, Resimac’s floating rate is lower than what banks are offering. iLender adviser Jeff Royle, who is one of the biggest writers of non-bank loans in New Zealand, says the important question remains whether the client can afford it.
Sargeant says the actual level of the interest rate will vary from customer to customer, based on risk – and on an assessment of whatever led to the customer’s credit impairment.
She notes Pepper commissioned a survey which showed that 40% of people who had been declined by a mainstream bank had not looked elsewhere.
For good people with bad luck
Resimac New Zealand general manager Luke Jackson says the company was a leader in developing the near-prime market in this country.
“We do a prime offering and compete with the banks in that space. Then on the other side we also do credit-impaired.
“Bad things happen to good people. People come out of matrimonial splits and all sorts of things where they end up with adverse credit, and we have facilities that work for them.”
The way Jackson describes it, near prime works for good people who have had bad luck. They are not irresponsible wastrels who spend hours in the pub every night, and the non-bank lenders would not be reckless enough to advance money to such people.
He says near-prime customers are mainly decent people who have run into strife and need some help to put it behind them. Or they may have fallen victim to the new CCCFA rules.
“They may have a couple of credit issues which have aged, or which are of minor amounts, but they still don't fit the banks' appetite because of them. You wouldn't say they’ve got extreme credit issues, they are just in the near-prime space.”
Jackson says prime still makes up the lion's share of what his company does. But he wants Resimac to have something for everyone, and near prime helps them do that.
Price depends on risk
Like Pepper Money, Resimac’s nearprime loans vary in price.
“If you are less leveraged, like buying property with a 60% LVR (loan to value ratio), it is priced cheaper than if the LVR is 80%. It depends on the customer and on the level of risk.”
Resimac has two main types of mortgages - full doc and alt doc - which are adapted from American ways of assessing income. Alt-doc loans incur a slightly higher rate than full doc, and near prime would be about half a percentage point on top of those.
‘Near prime works for good people who have had bad luck. They are not irresponsible wastrels who spend hours in the pub every night’
More satisfaction helping people
Michelle Sargeant sees another advantage to near-prime lending: it is a more fun.
While she insists on being as careful with money as anyone else, she says there can be satisfaction in helping people get out of a mess. She cites the case of one of her clients, who had recently gone through breast cancer.
“She didn't have any trauma insurance or income-protection insurance, so she had to do what she could to pay her medical bills and feed her children.
“When you know you’re helping people to keep their homes, it is rewarding. Absolutely rewarding”.
Another client, Daniel, had recently finalised his divorce.
“Daniel was keen to use his small matrimonial settlement to get back into a home to provide stability for his children, of whom he had joint custody.
“His savings weren't quite enough… and he also got hit with two defaults due to his separation.
“His parents agreed to come on board, to split both the deposit and the loan. But because they were in their 60s, the mainstream lenders were unable to approve a 30-year loan.”
Griffiths says this is the sort of detail that non-bank lenders can and do work through, to the benefit of themselves and their clients.
New regulations may mean more near prime
At present the mortgage market is overwhelmingly dominated by the big five banks. That leaves a relatively small amount of total mortgage custom available to non-bank lenders.
But there’s speculation that the volume of paperwork required by the CCCFA will cost time and money, pushing some loan applicants, who are marginal anyway, below the threshold of acceptance by the mainstream banks.
If that happens, there could be more custom for non-banks, some of which could end up as near-prime lending. ✚
