Many Americans learned through Lending Club that they can refinance their credit card debt online; now, the lending marketplace is hoping they’ll start refinancing their automotive loans using its platform, too.
Indeed, though automotive lending is a massive market, car refinance is far smaller owing to a lack of awareness, suggests Lending Club CEO Scott Sanborn, with whom we spoke by phone earlier today. “People know they can refinance their home. But after their home, their car is their second-largest purchase, yet the car refinance market in the U.S. was about $40 billion last year.”
In comparison, the overall U.S. auto loan debt market had grown to $1.103 trillion by this past June, according to the research firm Experian Automotive.
For Lending Club, it’s a prime opportunity (no pun intended), though it carries plenty of risk, as well.
The publicly traded, San Francisco-based company has struggled throughout 2016, following the forced resignation of its founder and CEO Renaud Laplanche in May over alleged conflicts of interest and a mishandled sale of loans to Jefferies Group.
Laplanche’s departure shook investors’ faith that the platform was among the strongest in the world of online lending. It also prompted more investors to examine whether the platform had become overly reliant on Wall Street banks that were looking for yield but are notoriously fickle customers.
Scott Sanborn, who took over as CEO and who’d served as the company’s chief operating officer prior, has taken drastic steps to get the company back on course, but none has had a meaningful impact just yet.
For example, in addition to hiring a new CFO, a new COO, a new general counsel and a new chief capital officer, Bloomberg reports that a separate new initiative hasn’t gone as well as hoped: providing loans to small businesses via partnerships with Alibaba and Alphabet.
Asked about that earlier today, Sanborn says that what “gives us confidence when I think about auto is that it’s not just leveraging our technical skills and learnings but also takes advantage of our marketing acquisition skills,” which he suggests Lending Club has been less able to do with its small loans program, given that it’s depending on partners for their distribution.
Sanborn also argues that though Lending Club has plenty of competition, the large auto lenders aren’t among its worries, given the relationships they have with car dealers, who would “generally lose some of that revenue” if auto lenders offered their customers refinancing options, too.
We’ll see soon enough whether Sanborn is right.
Lending Club will begin refinancing car loans for California consumers with FICO scores above 640, and whose cars are less than 7 years old and have been driven fewer than 80,000 miles. Sanborn says that interest rates for California customers will range from 2.49 percent to 19.99 percent, and that the average borrower could save $1,350 over the life of their loan.
Initially, the loans, which Sanborn says will range from $5,000 to $50,000, will be made off the company’s balance sheet. Eventually, he says, the program will be extended nationwide to a wider variety of borrowers, and it will be funded by the same sources of capital that currently provide personal loans to borrowers at Lending Club.
Asked about the widespread perception that those capital sources are largely Wall Street investors who’ve lost some of their appetite for Lending Club’s platform, Sanborn says that impression is wrong.
“If you look at the mix of investors who are funding these loans, a large base are individuals — some of them regular everyday people but also high-net-worth individuals,” he says. Meanwhile, a “considerable portion of [our lenders] are regional and community banks that have been pushed out of consumer lending because it’s a business of scale.” As for Wall Street, he calls it a “minority” source of Lending Club’s overall funding.
Sanborn also dismisses concerns over rising auto loan default rates that have prompted some banks to scale back and for regulators to voice concern about deteriorating underwriting standards. Fitch Ratings underscored the issue in a late August report that found that among subprime and deep subprime borrowers — meaning those with FICO scores of less than 600 — 4.6 percent are 60 days or more behind on their auto loan payments, a 17 percent increase from a year earlier.
That data won’t apply to Lending Club borrowers, says Sanborn. “When you hear about where credit has been overextended, that’s deep subprime, and that’s not where we’re focusing at all,” he says, calling current default rates “well within historic norms, even if 2016 doesn’t look as good as 2015.”