Lending to sub-prime candidates is big business but comes with equally big risks. High-profile problems with doorstep lender Provident Financial (PFG) may have reduced investors’ appetite for the sector, yet the stock market flotation of another loans business, Amigo (AMGO), is good reason to reappraise this space.

Amigo has pioneered a new business model which keeps the interest charged within reason but also still lends to the sub-prime market. It is now the market leader in this area.

The loan agreement is signed by a borrowers’ guarantor in addition to the primary borrower. The guarantor will have a good credit rating, will possibly be a homeowner and will make a pledge to make the payments on the loans if the borrower fails to keep up.

Amigo will typically charge an interest rate of 49.9% APR with a maximum loan payout of around £10,000. The rate is considerably lower than many of its rivals which works in Amigo’s favour as it is seen as a more responsible lender and also more consumer-friendly compared to some high-cost short-term credit providers. Half of its new loans in the year to 31 March 2018 were made to repeat customers.

Shares in the £1.5bn company have so far risen by 14% to 314.75p since floating on 29 June 2018.

Demand for unsecured lending in general has risen due to population growth, economic growth, low interest rates, falling levels of unemployment and a recovery in consumer confidence, says Amigo.

The non-standard finance market accounts for 20% of the UK adult population. This is broken down into adults that are credit-impaired, have low credit status or no credit history, or are higher indebted.

These individuals are defined as near-prime, non-prime or sub-prime depending on their credit worthiness. Sub-prime is mainly someone with a poor credit history or who is judged to be a potentially high risk for default probably due to having a low income.

It shouldn’t come as a surprise that many sub-prime lenders run with comparatively high impairment rates. For instance Non-Standard Finance’s (NSF) rate of impairments for 2017 was 24% of revenue. Provident’s impairment charges came in at 40% of revenue.

In contrast, Amigo’s impairment in the year to March 2018 was 21.3% of revenue – a considerable jump from 9.5% in 2016 and 6.8% in 2017. It attributes this jump to the introduction of pilot lending in June 2016 which is loans that don’t pass the scorecards it uses for core loans.

In order to reduce its arrears, Amigo has recalibrated some scorecards, limited eligibility for repeat loans for higher risk customers and reduced the maximum loan size in certain circumstances.

Non-Standard Finance last year acquired a similar business to Amigo called George Banco, complementing its existing TrustTwo business which uses the guarantor system. George Banco was ranked the number two player in this market. (DS)

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