UPST Auto Lending and Credit Unions

[clydejaz]

In thinking about how UPST may grow their auto loan business I started wondering how big a role credit unions (CUs) play in the auto lending industry. Arguably UPST has been highly successful with CUs for personal lending and a natural extension is to work with them on auto loans.

I apologize if any of this has already been posted in the past year. Sometimes it’s hard to keep up with the amount of posts on companies like UPST so if this is redundant or off topic please delete.

The following research report from the Filene Research Institute (a banking and consumer finance think tank) is about a year old now but gives a good characterization of auto lending for CUs (it’s about a 15 minute read):

https://r.search.yahoo.com/_ylt=AwrTLZRdE_Nhoj8AHhJXNyoA;_yl…

Key take aways from the report:

• Overall 82% of new vehicle purchases and 34% of used vehicles were financed in 3Q20
• Vehicle financing makes up a significant fraction of CU loan portfolios, helps attract new members and strengthens existing member relationships
• As of 3Q20 CU auto loans totaled $343B, this is 19.1% of total assets and 29.6% of their total loans
• CUs currently have 26.2M auto loans, roughly 10% of the US adult population
• CU auto loans made up 25% of the $1.36T US auto loan industry
• Post pandemic consumers want digital, no contact, efficient lending and partnering with innovative leaders presents opportunity for CUs to differentiate and compete more aggressively with banks
• Auto lending is highly important to credit unions

The research report author recommends that CUs:

• Speed up their digital transition to online auto loans
• Adopt new innovative technology to better compete with banks

I have no idea if/when auto lending will become a material portion of UPSTs business or if they are pursuing this via the CU channel. However, it does seem that there is a natural fit for UPST and synergy with the CUs that could potentially contribute to significant future revenue.

clydejaz

[n8larson]

(getting caught up from January’s Sauls-post storm and Covid round at my house)
While my device can’t access the report, I have something to add on this from 1/27:

The research report author recommends that CUs:
- Speed up their digital transition to online auto loans
- Adopt new innovative technology to better compete with banks

I don’t have the impression at all that CUs need to improve their auto loan connection much. Although it’s only based on my own family’s experience, it’s a strong one. I have a large relationship with one of the biggest banks in the country. The only times I’ve financed a car purchase, both of which were with major brand dealers, I asked said big bank whether I should finance through them or a CU. They said there was no way they could touch the rate offers I’d get from a CU, and their auto loans were really best for people who wanted to keep their financial house tight (i.e., all accounts/loans with the same institution). I just had the dealer in each case send to me whichever CU was giving out the lowest rate for my loan amount and credit score. Once I paid off the loan I closed the CU account in each case. When I went in to the CU afterward in each case I asked them about that, they confirmed that pretty much any CU with half its act together will smoke major banks on a car loan every day of the week and twice on Sundays (I’m paraphrasing of course), but that they were a little surprised that Big Bank would admit that so directly.

I have no idea if/when auto lending will become a material portion of UPSTs business or if they are pursuing this via the CU channel. However, it does seem that there is a natural fit for UPST and synergy with the CUs that could potentially contribute to significant future revenue.

I’m a little more confident that it will, and that they are pursuing it. With that said, both of my auto loans started at the dealer, rather than through a CU. Origination, at least as the borrower sees it, could certainly work either way. So far they seem to be signing up more car dealers than CUs for their auto loan product but that’s just my general read. YMMV : )

-n8 (long/long haul, just added to lower avg basis to ~182)

[etagordon]

The success of UPST in the car financing market will largely depend on its marketing efforts. Car dealers get a cut for financing that originates the dealership. As a result, sometimes they are able to offer lower car prices because they make up for it with financing charges. Getting a decent interest rate with UPST will help consumers separate the car buying from the financing, and should provide clarity, on what they are actually paying, if they are savvy enough to understand the process.

Also, car dealers will push/pressure shoppers to buy that day, with available in-house financing. They understand that their chance of making a sale, drops if the customer has time to go home and cool off. If UPST can convince buyers that financing can be approved from the phone, in minutes, while at the dealership, the company will succeed. I think requiring buyers to go to a specific bank will not work well, unless there is an aggressive campaign to sign-up dealers and/or banks.

I would be curious to know more about UPST’s marketing efforts. When I do a google search for car financing or car loans, UPST appears nowhere on page one of google. When I go to UPST’s home page, I see that they currently only do auto re-finance, directly to the consumer. Car loans have to be initiated by a financial institution which uses UPST.

I applied for auto refinance, to look at the questions and process. I was refused because my newish car did not show up on the credit report.

When I called UPST I was placed on a long hold and finally hung up. Their automatic service did offer to call me back.

So I made a mistake in applying for car refinance, I should have asked for a personal loan. When I went back and attempted that, I was told I had to wait 30 days before I could again apply.

I am not impressed. My credit score is well north of 800 and clearly have the means. This brief experience is making me question my investment. I was also surprised at howe few questions I was asked. Other than biographical, age, income, wealth, it was really only interested in my highest degree and where I got it. So much for 1600 variables.

Also, when I google “personal loan”, I see no reference to upstart on the first page. This does not sound like an aggressive marketing campaign to me.

I am puzzled how it hopes to be a success if someone as credit-worthy as me is refused.

Just some grist for the mill.

Gordon

[BuyLower]

@Gordon - UPST isn’t trying to be a B2C type of company so I would disagree that UPST marketing efforts will dictate their success. In auto financing, being at the point of sale seems to be where all the money is. Getting dealerships will be where their success occurs for this vertical.

In terms of auto refinancing, the partner banks are going to be the ones doing the marketing and where the majority of people will look. As previously mentioned (on this thread or another recently) CU’s seem to have some of the best pricing on auto loans apart from the finance arms of the manufacturers. So signing up more banks/CU’s will be where their success occurs. Sure you can go direct to UPST, but that isn’t what they are focused on as they would be competing with their partner institutions.

You are not the first super prime credit score to be disappointed by a test application to UPST. But, you realize that you aren’t exactly the target market, right? About 1 in 5 American adults either have no credit history (“credit invisible”) or are unscorable. As a result, these individuals will have difficulty obtaining new lines of credit. The average credit score is also just above 700 or “prime” but that means there are also significant number of people who fall below “prime”. Those are the markets UPST decided to target when they created their AI/ML models. It makes sense to go after demand that is not being satisfied first.

Also, regarding the 1600 variables…did you expect to fill all that info in yourself? Once they have enough information to pinpoint who you are, I’m pretty sure they have access to those 1600 variables. Food for thought.

[TheMightyKhan]

“I was also surprised at how few questions I was asked. Other than biographical, age, income, wealth, it was really only interested in my highest degree and where I got it. So much for 1600 variables.”

My understanding is the 1600 variables are automatically sifted from public and private records. If you had to enter them all manually, nobody would submit to that. The questions it does ask, probably verifies which John Doe you are and is potentially compared to the record to make sure their data sources are accurate. Also, I doubt any one person’s record contains anywhere near all 1600 variables. That just represents the potential inputs considered by the models.