The White Knight in Title Lending
Title Lending, like its cousin payday lending has historically been maligned both by a subset of the media and a number of regulators alike. These industries are seen as predatory, charging abusive interest rates for short term loans that are difficult to pay back and set borrowers on a downward spiral of dependency on these loans. Even worse, a title loan is made against the title (ownership) of a borrower’s car. As a result, a borrower’s car could be repossessed, the primary mode of transportation in getting to work on a daily basis.
Title lending is a $5.3 billion dollar industry in the US. Despite being an asset backed loan, they often cost between 500% and 1000% APR. This is despite these loans being made at low LTV’s and being short-term in nature.
The Consumer Financial Protection Bureau (CFPB) has issued guidance to both payday and title lenders, instructing them to either keep rates below state usury laws (which traditionally don’t exceed 30% save in rare cases) or underwrite a loan to the point where the lender can understand its borrower’s ability to repay relative to their current financial situation.
Payday and title lenders are fighting this guidance, their core argument being that their cost of origination is too high to offer lower rates. The loans they make are often too small or too short in duration to be profitable if rates fall. For example, imagine it cost $200 to originate a loan, the revenue on the loan must exceed $200. This is hard to do if the loan is made with a 30-day term and is on $1,000 without charging an abusive rate. Further, the added cost of underwriting would be too expensive, especially in an industry where margins are already slim.
Consider that, according to a study in 2015 by Pew Charitable Trusts, the nation’s largest title lender spends roughly 66% of its revenue on overhead costs and only 18% on losses. This may be hard to believe at first but fact of the matter is that the average title lender store only serves about one unique customer a day (one of the industry leaders, TitleMax has over 1,000 brick and mortar locations).
As we’ve seen in many other industries, the Internet’s low to near zero marginal cost presents opportunities to disrupt legacy industries by undercutting businesses with high existing fixed overhead costs. The market inefficiencies in title lending fit squarely into this model as the opportunity for a tech-enabled, online title lender that can bring down the cost of origination and automate the underwriting process is a massive one. Our latest investment, Finova is working on accomplishing just that.
Finova is a tech-enabled title lending business currently licensed in Florida and Tennessee. The company offers loans at a rate 80% lower than the next closest competitor, and has proven it can originate loans for under $200 as well as mitigate risk by underwriting those loans better than traditional lenders.
Finova’s default rate has been in the low single digits to date, well below the industry average of 14%-17%, and it has only had to repossess two cars that were both reclaimed by their owners. Traditionally title lenders repossess 4% of cars and only 20% of owners ever reclaim their car.
We are becoming increasingly bad at saving. According to The Atlantic, over 40% of Americans cannot make a $400 emergency payment. 40% of Americans need access to short term, emergency cash. And their only other options are asking friends, defaulting, or taking loans from expensive incumbents.
Finova will make title lending fair, transparent and approachable. As a result, we believe that a larger number of borrowers will use the equity they have in their cars to tap into credit. We see a massive opportunity in becoming a white knight in an industry plagued by bad actors, and solving a problem that is becoming increasingly large and urgent as more and more Americans don’t have access to savings for emergency situations.
The founding team of Finova has incorporated the business as a B-Corp to help center its mission as a business with a social conscience and has also demonstrated its ability to execute. CEO Greg Keough and the rest of the management team are proven entrepreneurs and operators, having successfully built and sold other companies across their careers.
We are excited to announce our participation in their seed round, alongside our friends at MHS Capital, Refactor Capital and 500 Startups. We look forward to working alongside them in fighting to offer the underbanked and underserved a new, better option.