By Jon Prior
August 25, 2021
A boom in subprime auto lending has given way to a new frenzy for refinancing the same borrowers, as small banks and credit unions hunt for sources of loan growth.
Rather than relying heavily on dealerships for business, smaller lenders are increasingly turning to intermediary fintech companies like iLendingDirect to supply new customers who are not visiting showrooms because auto inventories remain quite low.
Lenders are sometimes halving borrowers’ interest rates — or offering even bigger cuts — from starting points that can be higher than 20%, according to industry executives. Many of these car owners are hesitant to trade in their vehicles, particularly in light of skyrocketing auto prices, and may now have higher credit scores after using recent government stimulus payments to pay down other debts.
Executives at companies that are riding the recent boom are hoping that auto refinancings, which lenders have traditionally viewed warily because car values depreciate, can become a more mainstream product.
“We’d like to grow it beyond a niche part of the financial ecosystem,” said iLendingDirect CEO Tom Holgate, who was named to the spot in July after the company received a major infusion from the private equity firm J.C. Flowers earlier this year.
Through July 31 of this year, about 2.1 million auto loans were refinanced, which was up 23% from the same period last year and a 31% increase from the first seven months of 2019, according to data from Experian.
iLendingDirect estimates that one in four subprime auto loans is overpriced. There could be as much as $300 billion in outstanding auto debt that, if refinanced, could save each borrower as much as $144 per month, Holgate said.
Holgate’s firm neither issues new auto loans nor refinances them. Instead, it recruits lenders to join its network by offering them ways to reach borrowers who may be looking to refinance.
While iLendingDirect does not report specific loan volumes, a company spokesman provided an internal chart showing a 177% compounded annual growth rate so far in 2021, which could almost double next year, according to the firm’s forecasts.
In the last 15 months, iLendingDirect has been connecting with more small banks, but in particular with credit unions, Holgate said.
Credit unions, which have long seen auto loans as a good way to grow their membership, accounted for about 18% of the total U.S. auto loan market in the second quarter of 2021, according to Experian. With auto purchases currently slowed by the international chip shortage, refinancing could offer credit unions a way to supplement the car purchase loan business.
Mike McWethy, chief experience officer at Texans Credit Union, which has been offering auto refinancing in the commuter-heavy Dallas-Fort Worth area for years, said that three or four nearby credit unions have jumped into the market in the last six months alone.
“This is the exciting new toy,” McWethy said.
Many consumers with overpriced auto loans would be surprised by how much their rates can be reduced, he said. He cited one particular borrower with an interest rate above 20% who got refinanced down to 4%.
“The person who fell in love with a red Toyota Corolla was likely taken advantage of,” McWethy said. “We can back them out of what they fell into at the dealership.”
But McWethy is skeptical that new entrants into the refinancing market will remain committed over the long run.
Texans Credit Union reaches out to about 20,000 auto loan holders per month about a potential refinance, which can come at a heavy cost to a lender that is new in the market, he said.
“You see a real desire to get into this market, but an unawareness,” McWerthy said. “So they’re having to leverage companies like iLending and many others to do it.”
Despite the market’s recent growth, an even bigger pool of borrowers could soon become interested in refinancing their auto loans, according to analysts.
Roughly 1.6 million homeowners are still in forbearance plans on their home loans, according to the Mortgage Bankers Association. Once this relief is lifted, many of those borrowers could look for ways to lower their monthly payments on other debts.
“If you went the past year without making a mortgage payment, you weren’t too worried about what your car payment was,” said Austin Kilgore, director of digital lending at Javelin Strategy & Research. “Refinancing an auto loan might be a way to manage a household balance sheet.”
It’s unclear if the auto refinancing growth, particularly for subprime borrowers, will balloon enough to introduce worrying amounts of risk in the financial system or attract the kinds of unsavory lenders that could raise flags with regulators.
Jim Minge, CEO of Texas Trust Credit Union, said his company has seen “significant” growth in auto refinancing offers over the last 18 months and is starting to reach out to nonmembers. So far, he is not worried about regulators restraining growth in an effort to manage risk in a hot market.
“A car loan is a car loan,” Minge said. “Unless you drastically change your risk appetite or explode your portfolio, the regulators respect that you have to attract market share, in our experience.”
The prospect that a better deal might be available is taking hold among more drivers every day, Holgate said. But he acknowledged that it will be a challenge to continue the momentum once the car market gets back to normal.
“Some of it is a mental block,” he said about pitching auto refinancing to borrowers who never thought it was possible. “There are so many people in America who think a car payment you get at the dealership is just what you do.”