Auto loans is the largest market that still remains largely untapped by the marketplace lending industry. There are just a few marketplace lenders that offer car loans and there is a tremendous opportunity. There are over $400 billion worth of car loans made every year and DriverUp is one of these companies that hopes to capitalize on the trillion dollar market opportunity. I spoke to Sam Ellis, Founder and CEO to learn more about their approach to auto loans and to talk about their latest fundraising round.
In 2012, DriverUp started with the goal to bring transparency to the auto lending market. They started with a few dealer partnerships in order to build the core processes and developed the software for selling loans directly. DriverUp officially launched in February of 2015.
DriverUp’s Latest Fund Raising Round
On September 24th, 2015 DriverUp announced a $20 million series B round. SF Capital, a new investor to DriverUp led the round along with two existing investors, Emerald Development Managers and RRE Ventures. SF Capital is a name that comes up frequently and has invested in Patch of Land, BorrowersFirst and most recently, Cloud Lending Solutions.
I asked Sam to elaborate on how they plan to use the new capital. What makes DriverUp different is that at origination, the loan is pre-funded by DriverUp before being put on the marketplace. This is a similar strategy that real estate crowdfunding companies employ because it allows for a better experience for the borrower and the dealer. They know immediately whether the loan is approved. Some of this capital will be used to stock the shelves so to speak with loan inventory.
DriverUp will also continue to build out the software. They have several initiatives including e-signatures, image capture documents and a completely paperless experience. Sam also mentioned their upcoming mobile app which will remove much of the paperwork you usually have to fill out at the dealership. This is great for borrowers since car shopping usually starts online, but finishes in the dealership. The mobile app will keep dealers in the loop so they can focus on what they do best, which is reconditioning, trade-ins etc. The traditional two hours of paperwork will be a thing of the past with a DriverUp loan. The mobile app is slated to be released this year in selective markets.
DriverUp also plans to invest heavily in formal advertising to get their offering out in front of consumers. Until now, they have driven growth primarily from word of mouth and relationships with dealerships.
Investing on DriverUp
Investing is open to accredited investors only. Sam mentioned that they currently have 70 accredited investors, but several others, including endowments and banks are in the process of doing due diligence and evaluating the business, something that Sam encourages. As an investor, you purchase whole loans off of the platform. Details are given about each loan, including details about the car that was purchased. Investors can get an idea of how the platform works by viewing DriverUp’s company demo from LendIt USA 2015.
Similar to Lending Club and Prosper, DriverUp offers a download of their loan book to empower the investor. Investors can focus on investing in loans in certain geographies, and even the make or model of the car. Although it is possible to create a complex credit model and automate your investment, Sam noted that with their 3rd generation scoring model he would be surprised if someone could create a better model.
Rates for DriverUp car loans start at 8% and go up from there. Although it is still quite early, Sam stated that returns to the investor will end up around 8-9% annually after servicing costs, which is comparable to what investors have earned through other marketplace lenders. The reason they are focusing on the used car market is because it is hard to compete with aggressive captive finance companies who offer extremely low rates to move inventory and get borrowers in new vehicles.
As you’d expect, DriverUp currently partners with a few hundred dealers to drive borrower acquisition. Although dealerships usually offer loans from various companies, DriverUp aims to be a meaningful one. The dealer has an easy to use dashboard and the customer is able to fill out their application for a DriverUp loan.
It is still early early days for DriverUp, but with such a large addressable market and a focus on technology it wouldn’t be surprising to see DriverUp as a compelling choice for borrowers across the U.S. Sam has a lot of experience in the auto finance industry and after talking to him it is clear they have taken a thoughtful approach to their offering. For investors looking for a way to diversify, investing in loans backed by an asset looks very appealing.