Auto refinance enters the spotlight

Refinance: The term brings to mind four walls and a roof as mortgage has long been the bellwether of the refinance industry. But these days, with low interest rates, a universal desire to save money amid the COVID-19 pandemic, and the recent shift to digital lending, auto refinancing has gained momentum. Americans are applying to refinance their car loans at a rate that is up 16% in 2020 compared with 2019, according to the RateGenius State of Auto Refinancing 2021 report. The report analyzed more than 1 million auto loan refinance applications from 2019 to 2020, and found that about 17% more borrowers were able to refinance their vehicle loans in 2020 than the prior year. Digital refinance fintechs have made it easy for customers to apply for a new car loan with a few clicks of the mouse, helping to drive the trend forward. Time to shine Consumer adoption of auto refinance has been hindered by a lack of awareness of the option, but low interest rates and the COVID-19 economic crisis have encouraged consumers to learn how to restructure their vehicle loans, Gravity Lending Chief Executive Brian Jones told Auto Finance News . Gravity, an Austin-based refinance fintech, uses digital ads on social media, Google and other websites to target potential customers. “Customer education is finally there, and acknowledgement of the product is more widely accepted than it ever was before,” Jones said. The pandemic of the past year reshaped the auto industry in multiple ways, including kick-starting the refinance business. Navy Federal Credit Union , for one, saw refinance application volume rise “tremendously” at the start of the pandemic, driven by affordable rates, Joe Pendergast , vice president of consumer lending, told AFN . Pendergast did not provide specific application numbers. “We continue to see a steady pace in auto loan applications, and are poised for another strong year of new and used auto purchase originations, as well as refinances,” Pendergast noted. The Federal Reserve maintains a target interest rate of 0% to 0.25%, setting the stage for auto’s time to shine in the refinance market. Nationally, the average interest rate for used vehicles sat at 4.18% as of Feb. 12, a decrease of 60 basis points year over year, according to Informa Research Services. Interest rates on used and new vehicles in 2020 steadily decreased from 2019. On top of low interest rates, inventory shortages and pricier cars are also fueling the growth of refinancing, RateGenius Chief Executive Chris Speltz told AFN . Used-car prices increased 4% from October 2020 to February 2021, according to Manheim . The Manheim Used Vehicle Value Index in February increased 17.4% YoY to 168.4, an increase of 3.3% from January. At the same time, used-vehicle retail inventory reached a normal 45 days' supply in February after months below typical levels, according to vAuto data. On the consumer side, Americans who refinanced their car loans in 2020 saved an average of $989, the highest amount since 2016, with 42% realizing a savings of at least $1,000 annually, according to RateGenius. In many cases, interest rates on car loans were halved to an average of 5.5%, enticing customers to refinance their auto loans as soon as 14.5 months into their existing term, according to the report. On the lender side, auto loans and refinance helped boost business, especially at credit unions, where the loan-to-deposit rate fell to 75.6% in September 2020, the lowest point since June 2015, Speltz said. “They had a lot of money to lend, and they had a desire to lend,” he noted. Refinance also became particularly enticing to auto lenders when the pandemic closed dealerships and made it harder for consumers to purchase a car, Christine Pierson , chief executive of auto finance fintech Tresl , told AFN . “Our refinance [business] more than doubled last year,” Pierson said. “Consumers were looking for more ways to save money, and our banking partners were looking for ways to fill their portfolio needs.” The number of applications on Tresl’s platform per month increased 115% in 2020 as the fintech added 40% more lenders to its refinance channel, Mitchel Janssen , product and marketing manager for the fintech, told AFN . “We had more interest from lenders approaching us in 2020 than we've really seen before as they try to capitalize on the changes in the refinance market,” Janssen said, noting that Tresl entered the auto refinance market back in 2011. The number of consumers who viewed an application and completed a refinance loan through a lender on the platform increased by 76% in 2019, and by an additional 50% in 2020, Janssen said. Part of Tresl’s success was due to its adoption in the first quarter of 2019 of pre-qualification software powered by CreditSnap , which contributed to an immediate 300% increase in Tresl’s look-to-book rate, Janssen added. Banks, credit unions and other finance companies also showed immediate interest following the launch of Tresl’s BankingAmplifed solution in January 2021. The solution is a joint partnership with CreditSnap that allows lenders to offer a direct-to-consumer auto refinance program within 60 days, Janssen said. Tresl has prioritized connecting with digitally enabled lenders with a goal of offering refinance transactions 100% electronically by May of this year, he added. Raising the (digital) curtain Digital refinance has paved the way for auto lenders and fintechs to work together to capture online customers who want to lower their car payments. Gravity Lending, for example, logged a 400% month-to-month increase in originations in July 2020 to $16 million, and has seen consistent growth each month since, Jones said. The fintech, which opened for business online in August 2019, connects customers with the best refinance officer available from a host of lenders, and allows them to complete the entire process online, including any paperwork. Upon approval, Gravity passes the completed funding package to the lender. Gravity processes more than 15,000 refinance applications each month and expects to see volume increase by 10% per month for the foreseeable future, Jones told AFN . The fintech has closed more than $150 million in loans since Gravity opened its doors, and aims to reach $500 million in 2021 as the company connects with more lenders in the 46 states in which it operates, Jones added. Fintechs help auto lenders connect with consumers they may not otherwise find, and helps them meet their lending goals, Jones noted. “The digital landscape gives us the ability to get in touch with far more consumers much more efficiently at a much lower cost,” he said, adding that more than 80% of applications on Gravity’s platform are completed on mobile devices. RefiJet is another refinance fintech that has grown quickly. The company has experienced a 36% spike in applications on its digital platform since March. As of January 2021, the fintech was receiving about 1,800 applications per month and expects the number of loans facilitated on the platform to increase to 2,500 per month by the end of 2021, Chief Executive Reid Rubenstein told AFN . Application volume, he noted, has begun to stabilize to pre-pandemic levels, but remains high as more lenders join the platform. “Digital financing is the future of the industry. Everybody’s going to use their phone and get approved for a loan, usually before they shop for a car,” Rubenstein said. “Brick-and-mortar [shopping] is slowly evaporating.” New players have joined the market amid the rise of digital lending and the surge in demand for auto refinance. Fintech startup MotoRefi , for one, has raised more than $20 million so far from investors to aid the company’s growth, according to a company statement. The Arlington, Va.-based refinance fintech received $10 million in January in a second round of series A funding led by Moderne Ventures , an early stage venture capital fund. Another round of Series A funding in February 2020, led by Accomplice and Link Ventures , garnered an additional $9.4 million for MotoRefi. Founded in 2017, MotoRefi will use the funding to add new team members, expand its presence in the auto refinance market and invest in the fintech’s platform, Chief Executive Kevin Bennett told AFN . Through a digital application and approval process, MotoRefi connects auto lenders with consumers seeking to refinance their car loans, Bennett said. Once consumers are matched with their best refinance offer, the fintech originates the loan and completes all documentation before the lender adds the loan to its balance sheet, he added. MotoRefi works primarily with credit unions, as well as community banks and other financiers, and facilitated more than $250 million in vehicle refinance loans last year, Bennett said. In 2020, MotoRefi increased its revenue by six times and doubled the number of lenders on its platform. Bennet said the company does not publicly identify which lenders, or how many, use the platform. “We’re bringing those customers into that funnel and giving them that digital experience, making it more efficient for the customer and more efficient and cheaper for the lender, then handing off a happy customer and a fully compliant loan,” Bennett noted. Stepping into the spotlight Auto lenders are jumping into digital refinance, spurred by the entrance of multiple refinance fintechs to the industry in recent years, increased consumer awareness, and a heightened need for consumers to save money on car payments. In late 2019, Westlake Financial relaunched its refinance program, which includes digital capabilities, and focused efforts on growing the program in 2020, leading to the generation of $100 million in total managed auto refinance assets, David Goff , chief marketing officer, told AFN . “That’s huge,” he said. At Bank of America , 68% of refinance applications are currently made through digital channels, up from 41% at the start of 2020, largely due to low interest rates and the consumers’ propensity for digital transactions during the pandemic, Tim Owens , consumer vehicle lending sales executive for the bank, told AFN . Refinance makes up about one-third of the bank’s direct origination volume, Owens said, adding that the bank’s 35,000-plus client facing professionals mention refinance to customers, when applicable. An online shift also was felt at Navy Federal , which processed 64% of refinance applications through digital channels in 2020, compared with 52% in 2019, Pendergast said. PNC Financial Services , too, continues to see more refinance business through digital means following a pandemic-spurred shift away from branches, Strati Papageorge , head of direct auto lending, told AFN . Encore The federal stimulus payments, low interest rates, and economic stress that brought auto refinance into the spotlight in 2020 will likely continue in 2021, RateGenius’ Speltz said, noting that much is still to be determined as vaccines become available. Vehicle prices are unlikely to drop as new technology continues to be added to cars, which drives up prices and helps them hold their value, therefore boosting the need for refinance options, Bank of America’s Owens said. The curtain may have been raised and the spotlight centered on auto refinance in 2020, but the end of the year doesn’t mean the end of the show. The industry is poised for continued growth in refinance. Auto outstandings constitute the third largest pool of consumer debt in the U.S., behind mortgages and student loans. Still, more consumers hold auto loans than the other types, so the refinance space will continue to grow along with consumer awareness of it, Speltz noted. “Consumers are very aware that you can refinance credit card debt with personal loans or other types of loans, but there's less awareness of the ability to refinance an auto loan,” Speltz said. “Driving some of the growth in the business is the growth in the awareness of the ability to refinance, and why it makes sense.” Auto Finance Innovation Summit, the premier event for technology in auto finance, returns March 16-17, 2021, as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2021 event and register, visit www.AutoFinanceInnovation.com .

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