Garnet Capital Advisors Blog

Subprime credit card loan growth has recently outpaced that of prime cards.

The lending market landscape has seen a significant shift over the recent past with a nonbank increasing focus on lending to near- and subprime borrowers. While an increasing number of banks are shedding their nonprime clients to focus more on the less risky prime borrowers, nonbank lenders are continually stepping in to fill this void and better serve the financial needs of consumers who may not necessarily fit the prime lending profile.

That’s good news for borrowers who struggle with their credit, as it means there is more competition among nonbank lenders who are vying for their business. With stiffer competition typically means lower costs and more attractive terms for loans.

More Banks Dumping a Share of Their Subprime Cards in Favor of Prime Products

A growing number of banks are dumping their subprime credit card products, while a host of their nonbank counterparts are coming up with cards that better meet the needs of the average subprime consumer.

There is growing concern among many lenders that a turn for the worse in the credit cycle may soon be on the horizon which could result in major losses. While still near record lows, credit card defaults have recently been climbing. Many large lenders have even been experiencing a spike in charge-offs.

Barclaycard - a credit card issuer who’s parent company is British bank Barclays PLC - is eliminating a large chunk of its subprime card balances. It recently sold off $1.6 billion worth of credit card balances that were predominantly owed by near-prime and subprime consumers to Texas-based Credit Shop.

Defaults in payments were up at Barclaycard: 30-day delinquencies reached 2.6 percent in Q4 2016, up from 2.2 percent the same time the year before, and 90-day delinquencies hit 1.3 percent, up from 1.1 percent a year earlier. However, the majority of the credit card balances that were a part of this deal were not delinquent.

This deal is one that reflects an increasingly popular view of the card industry regarding the potential risk of lending to nonprime borrowers.

Credit Shop - which mainly focuses on providing personal loan products to near-prime and subprime consumers - is also planning on releasing its own credit card in the near future.

Nonbank lenders are increasingly occupying a larger space in subprime loans to better serve the financial needs of Americans with subpar credit scores.

Access to More Affordable Credit Card Products With Burgeoning Number of Issuers

Newly created company Fair Square Financial Holdings also recently launched its Ollo credit card, which may come with a slightly higher APR for those with bad credit at 24.99 percent, but has no annual fee. The firm’s second product, the Ollo Rewards card, also comes with a variable-rate APR of 24.99 percent and a $39 annual fee, but cardholders get 1 to 2 percent in cash back as a perk.

The executive team at Fair Square Financial Holdings is actually made up of many previous members of some of the biggest names in finance, including Bank of America, Capital One, and JPMorgan Chase.

Other nonbank lenders are also capitalizing on near- and subprime cards, including subprime lender LendUp which launched its credit card in 2015. The card has since exploded in availability.

Teaming Up With a Loan Sale Advisor to Ensure Compliant and Profitable Loan Sales and Acquisitions

New players are continuing to enter the nonprime space, and nonbank lenders may be a better home for subprime consumers. This business is poised to grow, but with such growth may also come portfolio stress.

As the trend for nonprime loans moving from banks to nonbank lenders continues to increase, both sides of the game need to do their due diligence in terms of its sales and acquisitions. Nonprime lenders should consider selling their charge-offs in order to ensure compliance, better manage FTE in the collections process, and accelerate cash flow. Similarly, banks should consider selling a portion of their portfolios to trim their demographics.

Under both circumstances, the right loan sale advisor can prove to be an invaluable teammate. Keep up with news and trends in the industry, sign up for the Garnet Capital newsletter today.