LendingClub’s New Pitch? Refinance Your Pricey Car Loan With UsBy
Company seeks piece of $1 trillion U.S. auto-debt market
Move comes amid signs of stress in automobile lending
LendingClub Corp. developed a popular way to refinance credit-card debt online. Now, the company wants to take on auto loans.
On Tuesday, it said it will start refinancing car loans at interest rates that could save the average borrower $1,350 over the term of their debt. To do so, LendingClub will draw on its experience finding potential customers and efficiently underwriting them to deliver instant offers online.
“People think a lot about refinancing their mortgage, but they don’t think much about refinancing their vehicle,” LendingClub Chief Executive Officer Scott Sanborn said in a phone interview. His company’s pitch: “We know you’ve got a loan, and it’s not a very good loan. Let us show you what we can save you.”
The initiative provides LendingClub with a big new market to tap as it tries to move on from a management shakeup this year that halted growth. More than $1 trillion in auto debt is outstanding in the U.S. and only $40 billion of it is refinanced annually, according to the San Francisco-based company. By getting into auto lending, LendingClub can differentiate itself from competitors like Social Finance Inc. and Goldman Sachs Group Inc. that have encroached on its turf.
Still, LendingClub is coming into the market at a tough time. Subprime borrowers are falling behind on car payments at the highest rate in more than six years, S&P Global Ratings said earlier this month. Increased competition has caused some lenders to lower prices and loosen credit standards, the ratings firm said.
In the year ended in June, only 5.2 percent of car-loan applications were rejected, according to research from the Federal Reserve Bank of New York. That’s down from 11.1 percent in the 12 months ended in October 2015.
“We’re well aware of those trends,” Sanborn said. “If you look at the overall market, credit has broadly continued to be quite stable.”
LendingClub will initially offer the loans to California consumers with FICO scores above 640, then plans to expand nationally to borrowers across the credit spectrum. Potential customers will have to have made at least three on-time payments on their loans. Vehicles must be less than 7 years old and have fewer than 80,000 miles on the odometer. Loans will range from $5,000 to $50,000. Annual interest rates in California will be 2.49 percent to 19.99 percent.
LendingClub started in 2006 and was one of the first companies in the U.S. to develop an online model for matching borrowers with investors who want to fund them. Often called a peer-to-peer or marketplace lender, its primary products are three- and five-year unsecured consumer installment loans that many people use to pay credit-card debt or fund big purchases. LendingClub has arranged more than $20 billion in debt.
While the company eventually intends to use its marketplace model to fund the auto loans, it will start by buying them for its own balance sheet, Sanborn said. He expects banks to be a primary purchaser for prime auto loans over time. Use of the balance sheet will be temporary and not material, he said.
“We’ll be fully out of by the end of next year,” Sanborn said.
New initiatives haven’t always fared well for LendingClub. In 2015, it announced high-profile partnerships with Alibaba Group Holding Ltd. and Google parent Alphabet Inc. to provide loans to small businesses. While the company still works in that area, originations have grown much more slowly than for LendingClub’s consumer-focused business.
Earlier this year, the company’s founder and former CEO, Renaud Laplanche, hinted that LendingClub was expanding into a new area and planned to announce details in June. But, in May, he resigned amid an internal investigation into a botched sale of loans to Jefferies Group. The revelations sent LendingClub’s shares tumbling and caused many buyers of the company’s loans to slow or suspend purchases.
Since then, Sanborn has been working to restore trust with investors. He’s hired a chief financial officer and former Wall Street executives to help put the company back on a path to growth. Earlier this month, the company took steps to improve returns that investors get buying loans on its platform.
LendingClub shares have rebounded about 40 percent to $4.87 from their low in May. But they still trade well below the company’s $15 initial public offering price in December 2014. Sanborn has said that many of the largest loan buyers have returned, although they’re purchasing in lower volumes.
While auto lending is the company’s first secured product, Sanborn said that it’s a more natural extension of LendingClub’s business than past efforts to enter new markets.
“The customer acquisition machine we’ve built and the optimization machine we’ve built,” he said, “this is tapping right into it.”
— With assistance by Matt Scully