UPST and Auto Loans

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An article on car loans in the January, 2022 issue of Consumer Reports has some startling statistics on the state of the industry.

  1. One in eight cars of Non-Prime Borrowers is repossessed.
  2. Between 2017 and 2019 more than 1.6 million cars were repossessed annually.
  3. Of 850,000 loans reviewed by CR, 96% of borrowers did not have their income verified.

If ever a market was ripe for innovation and a new approach to approving borrowers this is it.

Of course, we do not know yet if the same factors that UPST uses for personal loans will work with auto loans. We also don’t know if dealers, who make or arrange most of the auto loans will work with UPST. As CR points out, Dealers and auto lenders appear to charge what they can get away with for loans. If dealers feel that UPST will cut out a major source of revenue, then UPST has a major hurdle to overcome.

Right now UPST is a “story stock” for auto loans. But if it is able to penetrate this market with improved numbers on defaults and repossessions, lenders and other firms that buy packages of auto loans will push this new approach down to the dealers.

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An article on car loans in the January, 2022 issue of Consumer Reports has some startling statistics on the state of the industry.

1. One in eight cars of Non-Prime Borrowers is repossessed.
2. Between 2017 and 2019 more than 1.6 million cars were repossessed annually.
3. Of 850,000 loans reviewed by CR, 96% of borrowers did not have their income verified.

So, I agree with your principles. (In fact I just posted some similar thoughts.)

But I do want to highlight that when you start including statistics from nonprime you end up with some data that can skew things. Man “car” loans are predatory “title” loans.

e.g.

“The power company threatening to turn off my power and I have no money to pay them, and a bad credit rating so I can’t borrow. But there’s this storefront neably that offers ‘Money today, no credit check required’. And a friendly lady there gave me the $500 I needed to keep the lights on. 24% interest a year, but I have bad credit, so that’s not really that bad.”

The catch, of course, is that you had to give them your car title as collateral. (That’s the only reason they didn’t verify credit or income. They didn’t care because if you default they lose nothing; they get your car instead.) And that while the “interest” is only 24%, they also charge you a a $40 processing fee. And you have to renew it every month. So the effective interest rate is closer to 120%.

So eventually you get caught in the debt spiral and lose the car. And then declare bankruptcy.

But then you need a car to work. So you go to one of those “no credit refused” car dealers. Where they sell you a car for inflated price. And charge you a crazy interest rate to boot. (Many of the BHPH dealers in the paper I shared fall into this category.)

The point of which is that one of the reasons I like Upstart is that I feel like it legitimately wants to use technology to find the borrowers who will pay back their loans but which the traditional loan underwriting process is not working for. I think there is a lot of opportunity for that. Maybe we can even save some from predatory lending.

But statistics about auto loans can be skewed because of those predators. That 1 in 8 who is repossessed? Many of those may have been in situations where the lender knew that repossession was going to happen: that was their business model.

–CH

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And it is even worse. The car dealers take the car and sell it at auction, to an “uncle” who pays only the unpaid balance. The car is put back on the lot and resold for the same inflated price. Because so little money was generated at the “auction”. The buyer is still on the hook for the unpaid balance, and of course interest.

Gordon

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