Consumer credit markets were really confusing in 2020, and continue to be in 2021.
Intuitively, it would seem like default rates should have skyrocketed everywhere, but companies like Affirm have proven that certain parts of consumer credit markets either held up or performed better than ever before.
Across the portfolios we have looked at, we’ve seen two common trends:
Prepayments were up higher than ever
Default rates were higher than usual (but not so catastrophically that it put people out of business)
Consumer credit was a tale of two cities. If you still had your job, it was the best financial year of your life – and if you had lost your job it was a very difficult one.
And when we looked at which consumer lending businesses that outperformed through the pandemic, they are the ones that finance elect-purchases.
In healthcare, elect vs non-elect procedures come with very different payment characteristics to providers. As a lender, it’s not a terrible idea to finance an elected procedure (like plastic surgery) because by the time someone has chosen to receive the procedure they’ve most likely decided they can afford it.
But the medical payments that struggle are for non-elect procedures, like a broken arm. If you break your arm, you’re going to the hospital whether you think you can pay for it or not, so these come with higher default rates.
So in the pandemic, we started seeing “elect purchases” and “non-elect” purchases behave very differently.
Example of an elect payment: if you are buying a Peloton during the pandemic… You have your job and you’re having the best financial year of your life. Very few people who have lost their jobs are making elect purchases like that.
Example of a non-elect payment: If you are buying a car (especially a used one), it’s not quite clear if you can afford it. People need a car one way or another. Same with rent.
So when we think about which parts of consumer credit are most attractive during a crisis, weirdly we’ve become a bit more clear that it’s better to finance elect-purchases as opposed to non-elect because their performance is better on an adjusted basis.
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