Exploring the Loan Book of Auto One Acceptance
The growth in marketplace lending to date has been primarily driven by loans in the consumer unsecured space. In a blog post last year, we did an analysis of U.S. outstanding debt by asset class that you can see in the graph below. While consumer unsecured (in the form of credit card debt) is a notable slice of the market with $700 billion in outstanding debt, there are even larger markets in the form of mortgages, auto loans, and student loans. As the industry grows, we are seeing a number of interesting companies emerge with focuses on these segments.
In this post, we will be analyzing the loan portfolio of Auto One Acceptance. Auto One specializes in auto loans to “Generation Zero” Hispanic borrowers living in the United States for whom it has historically been difficult to receive financing due to their limited credit history.
Loan Book Analysis
In the graph below we see the distribution of loan sizes for Auto One’s loan book. This looks relatively similar to what we’ve gotten used to seeing for unsecured consumer loans, although the average loan size and maximum loan sizes for the Auto One portfolio look to be slightly lower. The average loan size is just above $10,000, and we see relatively few loans with balances greater than $20,000.
In the graph below we see the distribution of interest rates in the Auto One data. The range of interest rates is from approximately 16 to 27, with the bulk of loans falling between 17 and 25. Interestingly, we see three distinct groupings that emerge within the data, which may correspond to three groupings of borrowers based on credit characteristics or other factors.
In contrast to the now-common marketplace lending convention of issuing loans with either 36 or 60 month terms, Auto One shows a much more diverse distribution of loan terms. The majority still fall in the 36-60 month range, but there are loans with terms as low as 7 months and as high as 98 months.
One interesting aspect of the data that Auto One provides is the information on the cars underlying each loan, such as the make, model, and model year. In the graph below, we display the outstanding balances for loans based on the auto maker. We can see that the most common cars in the portfolio tend to be trucks or mid-range American and Japanese cars, while the least common cars tend to be more expensive luxury cars. This concentration of practical and work-friendly vehicles makes sense given Auto One’s borrower demographics.
Finally, let’s examine the performance of these loans by auto maker. In the graph below, we’ve plotted the loss rate (defaulted balance as a percentage of original balance) by auto maker. The size of the points corresponds to the original balance for that auto maker. To address noise in the data, we’ve removed any auto makers for which fewer than 15 borrowers received loans. What we see in the graph below is that while some loss rates exceed 20%, the larger loan balance vehicles tend to have much lower loss rates, between 10% and 15%. This could indicate that Auto One has been successful in targeting specific types of cars for loans, or that Auto One’s more reliable borrowers tend to select particular types of cars, but either way the lower loss rates among higher loan-balance vehicles is good news for Auto One.
As the marketplace lending industry continues to scale, we should expect to see increased originator and borrower focus on these larger segments of the credit spectrum. We’re already seeing some very interesting companies emerge in the auto, real estate, and student loan spaces, and we’re very excited to see how the industry develops over the next several years.