As living costs skyrocket, Transunion’s Q2 2023 report uncovers a disturbing trend: Canadians are sinking deeper into debt. From soaring auto-loan balances to increased credit dependency and alarming delinquency rates among Gen Z, the nation’s financial resilience is at stake. Are Canadians on the brink of a credit crisis? Dive into the data to find out.
Transunion’s Q2 2023 Credit Industry Insights on Canadian Credit Trends
As Canada grapples with increasing interest rates and a soaring cost of living, Transunion’s Q2 2023 report has shed light on a worrying trend: Canadians are becoming increasingly dependent on credit to manage their cash flow. The report indicates that there’s not only been an uptick in the number of consumers carrying credit balances, but there’s also been a noticeable surge in the average balances and minimum payments, especially in credit products such as auto loans.
In a deep dive into auto loans, the report reveals that the average balance on consumer auto loans in Q2 2023 experienced a 6% growth from the previous year, standing at $25,439. But what’s driving this shift towards greater reliance on credit? Transunion provides a clear answer, stating that these recent spikes in credit utilization are largely due to consumers seeking additional liquidity in the face of the mounting cost of living. In more stark terms, Canadian household debt touched a record-breaking $2.3 trillion in the last quarter, with a substantial $604 billion chunk being non-mortgage debt.
In response to this surging consumer demand, lenders have not remained passive. There’s been a 12% year-over-year growth in origination volumes, showcasing a broader risk appetite among lenders. This is evident in the breakdown, with below-prime originations expanding by 16% and prime or better originations growing by 6% compared to 2022.
Historically speaking, Canadians have always been known for their financial resilience. However, with debt levels soaring, especially among those considered riskier consumers, there are undeniable signs of financial stress appearing on the horizon.
Matthew Fabian, director of financial services research and consulting at TransUnion in Canada, weighed in on the situation, expressing concerns over the combined pressures of escalating living costs and high-interest rates. According to Fabian, this combination has introduced a “payment shock”, making debt even more burdensome for many Canadian households. While some have managed to mitigate this pressure through savings growth and strong employment, a significant number have resorted to accessing credit as a lifeline for short-term liquidity.
Furthermore, the report highlighted a 3.3% quarter-over-quarter rise in Canadians holding outstanding credit balances. Particularly concerning is the rise in card balances, attributed partly to enhanced spending habits and climbing interest rates on variable-rate loans. The average card balance for Canadians stood at just over $4,000, marking a 9% increase year-over-year. Despite this, there’s been a drop in monthly credit card payments, even as spending on these cards grew by 1.5% from the prior year.
The demand for new credit doesn’t show any signs of slowing either. In Q2 2023 alone, applications for new credit products surged by 17% compared to the previous year. This trend spanned across all borrower risk categories.
Rising debt levels, coupled with escalating interest rates, have led to increased monthly minimum payments, exerting additional stress on consumers. Auto-loan minimum payments, for example, saw a 5% year-over-year hike, averaging $640. Fabian commented on this strain, noting how these steeper payments are impacting household finances and forcing many to reconsider their spending priorities.
But it’s not just the overall consumers; specific demographics, like Gen Z, seem to be feeling the pinch more acutely. With a delinquency surge of around 13 basis points, this younger generation is facing challenges, possibly due to income instability. Many of them are also navigating the credit market for the first time, leading to potential “interest-rate shocks.”
Transunion’s data further delves into delinquency rates, pointing out that subprime consumers witnessed a 37% rise in delinquencies, and near-prime consumers saw a more alarming 56% increase. Unsecured credit products, like cards and personal loans, have been hit hardest in terms of rising delinquencies.
Closing his insights, Fabian emphasized the balance lenders must strike in the current macroeconomic landscape. While they’ve managed their risk strategies amidst growing consumer debts and higher minimum payments, they need to maintain growth strategies centered on resilient consumers, always keeping an eye out for those vulnerable to economic turbulence.