Transunion’s Q2 2023 Credit Industry Insights Report shows that Canadians are continuing to take on credit to help manage cash flow as interest rates spike and the cost of living continues to rise.

The number of consumers carrying a credit balance has spiked, and there has also been an increase in average balances and minimum payments per consumer across credit products — auto loans included.

Consumer auto-loan average balances found in Transunion’s Q2 2023 Credit Industry Insights Report rose by 6% year-over-year in Q2, coming in at $25,439.

Transunion said in the press release announcing report results that recent credit waves are fueled by consumers seeking additional liquidity in response to high cost of living. Canadian household debt hovers around a record high of $2.3 trillion last quarter, including $604 billion in non-mortgage debt.

Increased consumer demand was matched with lender supply as origination volumes also grew 12% year-over-year. The risk appetite of lenders has increased, as below prime originations grew 16% while prime and better originations grew by 6% from 2022.

Historically, Canadians have shown financial resilience. But as debt levels continue to go up among Canadians considered to be riskier consumers, signs of financial stress are beginning to surface.

“Canadians, like the economy, remain persistently resilient,” Matthew Fabian, director of financial services research and consulting at TransUnion in Canada, said in a press release. “However, the combined pressure of a high cost of living and elevated interest rates has created a payment shock, as the cost of debt has grown even heavier for some Canadian households. While some financial pressure has been offset through continued savings growth and strong employment, many Canadian consumers have accessed credit as a means to short-term liquidity.”

Canadians holding an outstanding credit balance rose by 3.3% from the previous quarter.

Card balances rose the most, due in part to higher spending habits and increased interest rates on variable-rate loans. The average Canadian consumer is holding just over $4,000 in card balances, up 9% year-over-year. And the average consumer spent $2,100 on their cards in Q2 2023, up 1.5% from prior year.  To offset this  increase in spending, consumers are paying less on their credit card balances each month.

But demand for new credit continued to grow. In Q2 2023, the volume of inquiries (applications) for new credit products grew 17% from prior year, a trend consistent across the borrower risk spectrum. Credit demand from prime and below consumers grew 15%, and demand from better than prime consumers grew by 12%, according to Transunion.

Minimum payments on the rise

Higher debt levels and interest rates are combining to create higher minimum payments per month, adding pressure to already stressed consumers. Prices of new and used cars are still historically high.

Auto-loan minimum payments were up by 5% year-over-year, reaching $640, according to the Transunion Canada report.

“This additional minimum payment has stressed some household finances, forcing consumers to make trade-offs in terms of how much they can allocate to cover additional debt,” Fabian said. “The sudden and often unexpected rise in minimum payment is referred to as payment shock and can have dramatic consequences as some consumers are forced to decide how to allocate discretionary income and, in some cases, which bills or debt to pay.”

Impact on delinquencies

Gen Z may be the generation struggling the most, with a delinquency increase of about 13 basis points. Transunion research shows this may be driven by income instability.

This young generation has also shown higher growth rates in origination volumes than other generations — as many of them are entering the credit market for the first time.

And some may be experiencing some “interest-rate shock.”

Drilling into the delinquency data, rates for subprime consumers rose by 37%, while near prime consumers saw delinquencies rise by 56$.

Contributing to delinquency are unsecured credit products like cards and personal loans have seen more drastic increases in delinquency.

“Lenders have held steady in balancing their risk strategies in the current macroeconomic context, but this environment continues to place some Canadians under stress, as balances grow and minimum payments are higher than before,” Fabian explained. “Lenders should maintain a growth strategy that allows for financial inclusion, by focusing on resilient consumers and helping those vulnerable to economic shocks.”