WIXLIB

The new growthopportunity inauto refinance

The new growth opportunity in auto refinanceWith over 1.3T in outstanding debt, auto lending is one of the largestconsumer lending categories behind mortgages.1 Despite its large size,banks and credit unions have struggled to build an auto loan portfoliothat is both large and profitable. This white paper examines why this isthe case and the emerging opportunities for lenders to grow a profitableauto loan program.Auto lending can be broken down into three broad categories: directpurchase lending, indirect lending, and refinance lending. Eachcategory of lending presents a different set of challenges to lenders.Indirect lending is the largest category of auto lending with ready-madevolume driven by dealers, but is also the least profitable for lenders.High levels of competition for borrowers compresses margins, and fewindirect customers ultimately build a larger relationship with the lender.Direct lending can be much more profitable, but is hard to grow. Manyconsumers do not think to line up financing before they purchase acar, and those who do are often enticed by the dealer to switch to anindirect loan at time of purchase.Despite the prevalence of mortgage refinancing, few lenders haveinvested heavily in auto refinancing. Today, refinancing only representsabout 5% of auto loan originations.2 It is often thought to be too difficultand expensive, particularly considering the smaller average loan size.However, new technologies and capabilities have made it possible tobuild a large, profitable portfolio through refinancing, representing alarge opportunity for lenders.2 UPSTART

The new growth opportunity in auto refinanceAuto refinance is ripe with opportunitySeveral factors make auto refinance an attractiveopportunity.First, auto refinance has the potential to becomea substantial part of an auto lending portfolio.TransUnion reported that of consumers whorefinanced, 86% saved over 10.3 This indicates awillingness for consumers to lessen monthly expenses,even if the amount is as low as 10. The report addedthat many refinanced for less than 30, underscoringthese were not edge cases. Upstart recently examinedthe auto lending market and existing loan volume usingsophisticated AI underwriting tools.We discovered that more than 25% of existing autoloans, or one in four, could be refinanced to saveborrowers at least 20 a month.4 That can translate toan opportunity worth hundreds of billions of dollars inpotential lending.Other factors that also make auto refinance attractive:No reliance on timing car purchases:There is no need to target consumers whoare in the market for an auto purchase,which is difficult to detect. More data isreadily available to find consumers whohave outstanding auto loans.Potentially less risk for the lender:Applicants already have a track record ofloan repayment.Build long-term customer relationships:Reducing monthly payments forconsumers may help establish trustand retention, providing more cross-sellopportunities.“We discovered that more than 25% of existing autoloans, or one in four, could be refinanced to saveborrowers at least 20 a month.4 That can translateto an opportunity worth hundreds of billions of dollarsin potential lending.”3 UPSTART

The new growth opportunity in auto refinanceHistorical barriers preventing auto refinance growthWith so many benefits, why is auto refinance sucha small share of most lenders’ auto portfolios?Historically, there have been several barriers that havemade it challenging for banks and credit unions to takeadvantage of this opportunity:High transaction costs: Relative to theirloan size, auto refinance loans tend tobe expensive to originate for banks andcredit unions. This is due to multiple stepsrequired, such as paying off the originalloan and working with state and localagencies to transfer the existing lien.Added burden for consumers: Thisprocess may entail making trips to theirlender, the DMV, or notary services.Lack of consumer awareness: Banks andcredit unions haven’t aggressively exploredgrowing this channel so lenders maynot have the experience driving demandthrough effective marketing.4 UPSTARTIn addition, the lending experience is of particularimportance to younger consumers of GenerationsY and Z. These groups are expanding to a largershare of the consumer market as they become moreestablished in their careers, earn more and increasepurchasing power. These younger consumers are aninformed group with high expectations and traditionalauto refinancing at a branch office is less attractive tothem. They want the refinancing process to be mobile,digital, and frictionless.

The new growth opportunity in auto refinanceAI paves the way for innovationA critical technological innovation that has made theauto refinance market more accessible and profitableto lenders is the rise of artificial intelligence (AI). AIcan solve several critical challenges that enable banksand credit unions to operate profitable auto refinanceprograms. Specifically, AI helps: Accurately assess and price the risk of borrowers Streamline the process to reduce cost andconsumer friction Target the right consumers to ensure marketingcosts are affordableRefinancing a loan requires an underwriting processthat can find pricing inefficiencies missed by theprevious lender. In some cases, lower rates can beachieved simply as a result of interest rate changesin the market or a positive improvement in theconsumer’s credit report. However, traditional creditscore-based underwriting models can’t effectively gobeyond those indicators to individually price consumerrisk to uncover inefficiencies.5 UPSTARTAI models use much larger data sets and employsophisticated algorithms to individually price consumerrisk, making it easier to offer lower rates safely, withoutincreasing default rates.“AI models use much larger data sets and employsophisticated algorithms to individually priceconsumer risk, making it easier to offer lower ratessafely, without increasing default rates.”AI underwriting also provides the opportunity for higherautomation in the loan origination and onboardingprocess. Credit decisions can be rendered instantly,and verification can also be performed in a matterof seconds by leveraging the vast amounts of dataand algorithms employed by AI. Given the multiplesteps and complexity of auto refinance loans,digital automation is critical in meeting consumers’expectations for a fast and simple digital experience.Used effectively, digital underwriting can eliminatetrips to the lender and DMV while reducing paperwork

The new growth opportunity in auto refinancerequired from borrowers. This also helps banks and creditunions automate and streamline backend processes toreduce origination costs and make auto refinance loansmore profitable.Finally, auto refinancing is a product that few consumersare aware of, requiring lenders to actively solicitconsumers who are currently paying too much ontheir auto loans. AI models can help lenders identifyconsumers with this latent need among both theirexisting customer base and consumers in their lendingfootprint. It enables them to reach the right consumerwith the right refinancing offer at the right time.3 strategies for winning inauto refinanceWhile the opportunity in auto refinancing is very large, inorder to be successful in building a profitable program,banks and credit unions need advanced capabilitiesin multiple areas. There are three critical componentsany lender needs in order to build a successful autorefinancing program. Lenders will have to determinewhich of these capabilities they can build in-house andwhere it makes sense to find best-in-class partners.6 UPSTART

The new growth opportunity in auto refinance1. MARKET THE OPPORTUNITY(PRECISE TARGETING)Auto refinance is a space where you need to knowthe right channels to leverage and to conduct theright targeting. It’s important to effectively findcustomers who are paying too much interest ontheir loans and would potentially want to refinance.Lenders should analyze customers’ transactionhistories for auto loan payments or identify potentialcandidates from trend lines in credit bureau reports.There are many tactics to consider, but it will be anew muscle to flex for many lenders.2. MAKE A COMPELLING OFFER(UNDERWRITING RISK)As banks and credit unions create demand forauto refinance, they need to offer consumers acompelling savings offer. This is where AI playsa critical role to help lenders accurately priceapplicants based on their individual risk.AI can also be highly effective at findingcreditworthy applicants in credit tiers just belowprime. At Upstart, we believe this is whereconsumers have often been overpriced due to thelack of sophisticated underwriting methods.57 UPSTARTWhile some institutions may build AI capabilitiesinternally, it makes more sense for lenders topartner with an AI provider from a speed andefficiency standpoint. This also helps avoid thehigh setup costs of building expertise and technicalinfrastructure. Lenders should consider AI providerswith a track record of success and a large history oftraining data, which is an important indicator of theaccuracy of an AI model.3. REMOVE BARRIERS FOR CONSUMERS(DIGITAL PROCESS)It is imperative to meet the expectations of today’sconsumer. Providing a fast and simple experiencecan be achieved with digital technology.When partnering with an AI provider, it is criticalthat the technology also includes a great digitalexperience. Consumers expect to complete loanapplications online or from a mobile device.The digital application itself should be easy tocomplete, present an instant soft credit decision,and find the vehicle and loan details withoutrequiring applicants to enter their VIN or licenseplate number. The automated verification process

The new growth opportunity in auto refinanceshould minimize the number of documents required byapplicants while keeping fraud levels low.An effective AI provider can effectively: Handle all the steps required to close the loan Pay off the old loan and perfect the lien, according to astate’s specific requirements Service the loan and offer repossession servicesBoth applicants and lenders should be relieved of theoverhead required to close the loan. This helps ensure agreat borrower experience and allows lenders to grow aprofitable auto loan portfolio by reducing costs.8 UPSTART

The new growth opportunity in auto refinanceExpand your potential for growthThe auto refinance market has historically been a small, unexploredoffering for banks and credit unions. However, new market trendsand innovations in AI underwriting technology now make it anemerging opportunity to fuel the growth of lenders’ auto loanportfolios.Partnering with an AI underwriting provider can help banks andcredit unions get to market quickly by accelerating the deploymentof AI technology to more accurately price and predict borrowerrisk. This enables them to make compelling refinance offers thatcan save borrowers money while keeping default rates low.At the same time, AI enables a highly automated digital experiencefor borrowers that significantly simplifies and automates theapplication process.It also helps streamline costs for banks and credit unions. Theresult is a new channel that can allow banks and credit unions togrow their auto loan portfolio profitably.If you’re interested in learning more about the auto refinancegrowth opportunity, or would like to speak with our team abouthow you can leverage Upstart’s AI-enabled auto refinancingsolution, please email lenders@upstart.com.9 UPSTART