Consumers are more comfortable buying online, even big ticket items like cars. A significant impediment to ecommerce in the auto industry is securing that loan. A frictionless experience is what Upstart is here to build.

Recently on Leaders in Lending, we chatted with Val Gui, Vice President – Automotive Lending at Upstart, about trends in the automotive lending space and how he forecasts the future of the industry.

Val began his career in automotive sales, which he attributes to teaching him how to focus on solving problems and adding value to customers’ lives. “All those things that translate really well to all sorts of sales,” he said.

Let’s dive right into the conversation!

Increased awareness about automotive lending

In short, consumers are generally more aware of automotive lending because they need it more.

Yes, automotive refi is less than 5% of the auto lending space, but in the last 4 years, it’s grown significantly. 

The problem with refi today is twofold: 1) lack of savings or 2) lack of convenience.

“Upstart’s really good at making things more convenient and using the underwriting to power additional savings,” Val said. Basically, it was the perfect opportunity.

Consumer awareness about auto refi has grown because, quite simply, debt has increased. “If you look at both the price of cars and how much people are actually borrowing to finance their cars, it's been on a steady, steady climb up,” Val said.

From a lending side, it hasn’t been a big focus because banks see it as risky, as well as being complex and time-consuming. Caveat: Some lenders, especially credit unions, do billions of dollars annually with auto refi, so it’s obviously a space with great potential.

Consumer expectations: digital

“Consumer expectations have really changed in terms of how they want to engage with all of the different companies in their lives. A big part of that is wanting to do things digitally,” Val said.

So many things have migrated online that consumers want digital auto loans as well. 

Key elements to solve the profitability and convenience challenges:

1. Accurate underwriting — if you can’t do this, you can’t make a compelling offer.
2. Operational efficiency — you’ll need to make everything very easy for both the borrower and yourselves.
3. Marketing and targeting — this last piece is about intelligently finding borrowers who aren’t your current customers to offer those better rates.

For banks and credit unions interested in the product, Val explained that this entire strategy came from a philosophy of underwriting convenience. They aimed to make auto lending as frictionless as personal loans can be, despite the fundamental differences in risk.

“We took our incident model, and we applied the pieces that were most applicable to auto, and now we're building on top of that to modify in a way that really fits to auto,” he said.

Reshaping the ecommerce mentality 

It’s a matter of risk. “We've learned a lot since we launched about how different our consumers are from personal loans,” Val said. Defining those categories while avoiding undue risk was just one of their major achievements.

“The mentality we had through all of this — and I credit this to Upstart’s culture — is that we think of almost everything as being iterative. There's no final form,” Val said.

A lot of the learnings would occur after launch, in the market itself. It took trial and error, as well as time, to reduce friction for customers. 

But boy, did it work.

“When we started in the auto program, the instant approval rate was almost zero. Now it's closer to 50-60%. We've made that iterative improvement over time, as we learned what things we can actually make better,” he said.

Recognizing that it’s a continually changing process was the mentality that helped them win.

Trends in ecommerce

When we’re looking at trends in ecommerce, there are a few things that stand out that we’ll have to adopt into our mentality about auto lending.

• Providing information online to equip consumers to understand different deal structures to make an informed purchase decision.
• Recognizing that consumers are much more educated about the different factors that are present in lending.
• Retooling traditional lending structures to fit within an ecommerce paradigm.

To summarize, here are 3 places for lenders to be investing in the automotive space:

1. The size of the auto refi market will stop lagging and start growing.
2. Auto sales is going digital, with all the flexibility that entails.
3. Back end products will become increasingly important for dealers.

Val’s parting advice

We end every podcast episode with the same 3 questions. Here’s Rob’s take:

1. Best piece of career advice: Be willing to entertain more career risk by taking a nontraditional path.
2. Best piece of auto advice: Buy pre-owned. Three years old is the sweet spot for getting the most value.

A bold prediction for lending: Within five years, over 35% of auto sales will be all digital.