Untapped Potential: The $1.7T Auto Refi Opportunity

[00:00] Nicholas Goraczkowski: We’re not a shotgun approach like others in this industry are. Some of the folks in this industry just take an application and they send it out to everybody to see who gets the best loan back. We don’t like doing that. That’s a waste of our resources. It’s the waste of our credit union partner’s resources. If they’ve already had that member, they’ve already earned that member and they deserve to have that member back.

[00:23] Narrator: Welcome to 22 Minutes in Lending your go-to podcast for insights on all things lending. From lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive into the latest in lending.

[00:46] Vince Passione: Welcome back to 22 Minutes in Lending. I’m your host, Vince Passione, and today we have the pleasure of speaking with Nic Goraczkowski, president of iLending. With nearly 30 years in the financial services industry, Nic has been instrumental in iLending’s growth. Under his leadership, the company’s become a leader in auto refinance and lender partnerships. Nic, welcome to the podcast.

[01:04] Nicholas Goraczkowski: Pleasure to be here. Thanks, Vince.

[01:06] Vince Passione: This is part two of our series on auto refinance. And we had Eric Stradley, the president Caribou on, and he had an interesting sort of stat. He said that there’s about 1.2 million auto loans that are refinanceable, but when you think about the number of people doing it, there aren’t many people that are out there. He said there’s like 10 million borrowers that could benefit from refinancing, but not all of them act on it. So why is that happening? Why don’t eligible borrowers or why do eligible borrowers hesitate to refinance their auto loans?

[01:43] Nicholas Goraczkowski: Well, the auto refinance market opportunity is massive. I mean, like you said, millions of borrowers are overpaying on their loans every single month. I think there’s a recent stat by the Fed Reserve Bank in New York over 1.6 trillion in outstanding auto debt. So you add that to the volume of auto loans is just astronomical. I think the main reason that a lot of borrowers don’t pursue this is everyone has heard of refinancing their mortgage. People know they can refinance their mortgage. Not a lot of folks know they can refinance their auto. It’s a lot easier process, and obviously they can save just as much money. So people get a little intimidated when they start think of something they’ve never done before. They’ve never heard of auto refinancing. They have all heard what the nightmares on the mortgage refinance can be. So a lot of folks don’t go down that path. Which is where we come in. A lot of our marketing, we can find the borrowers that are interested in refinancing, but a lot of our marketing is directed at consumers that don’t even know it’s a possibility.

[02:40] Vince Passione: Yeah. So we’ve talked about this. So you think it’s mostly it’s awareness, huh? That consumers really aren’t aware that this is something that they can do?

[02:48] Nicholas Goraczkowski: Absolutely. It’s a growing industry. You’re starting to see it more and more and more. With all the changes in the market coming in 2025 we definitely think there’s going to be a large increase in the market this year. There’s getting to be more awareness on TV and all the FinTechs out there bringing the idea of auto finance forward. But historically, just a lot of borrowers, a stat from a few years ago, from experience that there was almost 60% of folks that didn’t realize it was an option.

[03:16] Vince Passione: Yeah, it’s interesting stat. It’s almost consistent. When back in 2011, LendKey launched our education refinance business. We had a very similar stat out there
that we thought it was over like 60 to 70% of the population did not realize they could actually refinance their education loans. So interesting, interesting similarities.
Now, you touched on a stat, it’s an interesting one, outstanding auto loan balance is about $1.7 trillion. The other stat though is that average new car loan, the APR is about over 7% and uses over 11. So are you seeing an increase in consumers seeking refinance for just rate relief right now?

[03:59] Nicholas Goraczkowski: I think that’s the initial thought that most consumers have is they’ve been trained for those that are heard about it, I’m here to lower my interest rate.
When most consumers are really just looking for some payment freedom, some financial flexibility. You can’t take the interest rate to the grocery store, so a lot of our consumers just coming saying, how can I save some money and free up some resources for my family? Now, of course, there’s the other side of it where you have the more savvy borrowers who are just looking to save interest rate, and with the recent rate cuts, we’re able to provide that more than we could say, 2023, ’22, when the rates with the all time highs, they definitely dropped down this last year, and a lot of those consumers bought these car loans when those rates were at those super high interest rates. So now that we’re at the ability to lower those down for them,
we’re seeing those interest rate savings as well as monthly payment savings.

[04:49] Vince Passione: So Nic, what’s the average payment savings for today, and what was it at the height of the market? How has that shifted?

[05:00] Nicholas Goraczkowski: Right now. Our 90 day average is just over 5.5% for interest rate. That translates to about, actually $148 was our ending of last month was our monthly
savings deal. Now, part of that savings does come from some term adjustments and things like that. Right now, our average refinance terms come in about 68 months, which again aligns with that national average about 66 to 67 on a used car loan. We’re right there at 68 months.

[05:29] Vince Passione: So Nic, the audience for this podcast, lots of credit unions are subscribed, and in talking to some of the credit unions there’s always this misconception that auto refinance, I mean, credit unions do a lot of indirect auto. We have Navy as a client, they’re probably the largest direct auto originator in the credit union space. But is that a misconception that the refinance performance is worse than their indirect auto loan portfolio?

[06:00] Nicholas Goraczkowski: No. It kind of goes the opposite, really. When someone goes to a car dealership, they are a lot of time acting on emotion or immediate need. They’re going to add a new debt to their credit bureau. They’re going to be paying an additional debt they didn’t have before. So they’re increased their monthly debt. We have found, and our credit union partners have found that these refinance loans perform at a much higher level. You may have a 640 performing closer to a 700 because this is a debt the consumer has already one, proven that they can pay, and all we’re doing is lowering that monthly obligation for them. And two, they’re committed to staying in that vehicle. There’s more borrower hanging onto their cars for longer periods now than they have in a long, long time. So we don’t have to worry about them necessarily flipping that car as often they would’ve a few years ago. So they’re more likely to have that borrower stay in that loan, maintain their membership, and pay a payment that they’re already used to paying.

[06:53] Vince Passione: Yeah. We’ve talked about the relationship between LTV and the infamous back end. Can you, A, define the back end for those folks that aren’t familiar with it? And B, talk a little about, Eric talked about this during his podcast about LTV ratios and how they’ve come down. But let’s start off with the basics. The back end, what does that to you in your business? I’m familiar from the dealer side.

[07:16] Nicholas Goraczkowski: It’s pretty much the same thing. The back end is going to be the products and the protections that we sell the consumer. A back end product is generally going to be a cancelable product. So a consumer pays off the loan or case of a total loss or a default, whatever that may be, those products are collected and they’re canceled, and that money’s returned back to the borrower or the credit union.

[07:39] Vince Passione: And how does the LTV affect the back end? Right now LTVs have come down, right? We were talking, Eric, he said back two years ago was as high as 140. Now it’s come down to about 120. Are you seeing the same shift in LTVs and then also how does it affect your approval rates?

[07:57] Nicholas Goraczkowski: Yeah, I’ve definitely seen them tighten up a little bit.  Most of those tightening LTVs are going to be on the front end LTVs. Most of those credit union partners are going to be limiting anywhere from 110 to, there’s still a few out there doing 125, 130, depending on their model again. But that limitation is on the front end. The back end LTV is generally a set number with most of our partners. They’re going to tell you, you can do X dollars or X percent of whatever that loan balance is going to be. And because it’s a cancelable product, that’s not necessarily as much of a risk for the credit union because they know if that loan has any troubles that product can be canceled and they’ll get their
money back on those products, refund on that.

[08:37] Vince Passione: For credit unions that are thinking about going into the auto refinance business, what’s your average FICO now as they’re thinking about the way they typically
lend?

[08:47] Nicholas Goraczkowski: Our personal lending, our average score is running about a 683 right now. There are definitely some in this industry that run a little higher than that as they really stick to that prime paper. Whereas we’ve tried to focus a little more on full spectrum and helping some of those underserved borrowers, which is a great alignment with us and some of our credit union partners, as many credit unions like to help the underserved communities, and really that’s important to us as well. We like to get to those under-banked folks and really give them some opportunity. They may not have as high of a credit score as always, but that doesn’t mean they can’t be a great member. So we sometimes go a little deeper in the credit spectrum than others in the industry do.

[09:25] Vince Passione: Makes sense. Makes sense. So our business, like yours, our education refinance business very much impacted by the macro and the biggest factor being interest rates. So coming out of the end of last year we were all hoping or expecting inflation was going to decline, which the last market said it did, but Fed is not cutting as aggressively. So how does that affected your business and what changes have you made to offset some of that? I realize there’s a limit to what you can do, but this is a very large market when you think about the auto refinance market. So how has the Fed’s pace affected your expectation for 2025?

[10:08] Nicholas Goraczkowski: I think we all went into 2024, rewinding a little bit, I think the start of the year everyone was predicting seven rate cuts last year, and obviously that didn’t happen. So even approaching 2025, we did our internal budgeting and our internal modeling, we didn’t take the aggressive side of saying, hey, all these rate cuts are going to come this year. So we planned a little more conservatively, which is great for us now that obviously the markets have changed and maybe we see another rate cut this year, and maybe we don’t. Obviously if the rates cut again, that’ll help build a bit more and more business. However, even if the rates hold steady, we built our model so that all the borrowers who finance that, those peak loan rates in ’22, ’23 like we discussed, are still going to be seeking options to refinance their cars or credit improves. We can still save them money. We have worked on expanding our model to integrate additional verticals, additional ways to save borrowers money as well. Historically, we’ve locked onto just the auto refinance, but when we have that borrower coming to
us, they’re coming to save money. What other ways can we work for those borrowers with our credit union partners to make a member more sticky with additional verticals, additional lines, and really just help the credit union profile as well as the consumer overall financial picture?

[11:22]Vince Passione: So what are the verticals are you looking at? Are you helping them refinance their mortgages with your credit union partners, or am I misunderstanding the
verticals?

[11:30] Nicholas Goraczkowski: We haven’t really gotten to the mortgages, but we have a lot of credit union partners that we worked with who are looking to expand maybe personal
loans or maybe offer credit cards to those borrowers. So as opposed to just giving them an auto loan approval, hey, while we’re doing the auto loan, let’s offer them one of the ABC credit union’s credit cards that they’re going to have a program going, or maybe they’ve got some existing credit card debt that comes up during the underwriting process and the credit union offers them a consolidation of some credit card loans.

[11:59] Margie Click: Hello, this is Margie Click, CEO and president of Agriculture Federal Credit Union. As a $360 million credit union we’re always looking for ways to innovate and expand our financial solution offerings to attract new members. That’s why for nearly a decade, we have been partnering with LendKey to attract and acquire new credit union members.

[12:22] Vince Passione: So how do you see these credit union partnerships evolving for auto refinancing? Because some credit unions that we talk to they basically just offer a
flat fee, they call it member recapture. They tell any member, hey, if you refinance your auto loan with us because the member walked in… Like you said, it’s an emotional purchase, they went into a dealership, they purchased a vehicle, the dealer obtained financing from a bank, perhaps, and now the credit union basically says, hey, if you refinance with us we’ll give you a flat fee, whatever it is. But how do you see credit unions evolving into this auto refinancing space?

[13:03] Nicholas Goraczkowski: As we expand our side of the auto refinancing space I don’t see it impacting the credit unions in a negative way. We’re not looking to capture the business that they already receive. We’re looking to be additive to that. We’re getting into markets and front of those consumers that they wouldn’t normally see. Again, we do have large marketing campaigns and we can bring them borrowers that maybe live in a different state or maybe a different segment group that they didn’t know existed before. So we’ll bring them that.
In terms of how more and more get involved, I think there’s a lot of credit unions that pull back a few years ago with the instability in the auto market. Over the last few months, I mean, I’m picking up calls daily almost now with credit unions saying, how do I get back in the business? How do I expand my program? How do I get more? And so really, for those that are looking to grow, this is a great opportunity to do it. And for those that are looking to build in their community, if you can find a way to make a little more exclusive, unique product for
the folks in your community and you can capture that member for a day-to-day baking opportunity, I think that’s a great opportunity for credit unions to grow in this market.

[14:13] Vince Passione: No, makes a lot of sense. And then how do you position yourself? If a credit union says, hey, I’d rather do this myself, is it go ahead and do it and it’s additive and it doesn’t need to be excluding the work that you do today so they can keep doing the member recapture and you’re bringing them new members? And then second part, we’re trying to do this, but at any point in time do you see your tech enabling you to recognize this person’s a member and bring them back to that credit union if they happen to be on your platform?

[14:44] Nicholas Goraczkowski: I’d say we’re doing that today. So anyone’s currently on our platform and we notice that they… Well, let me rewind. If we notice they have an open trade line, we’re not necessarily going to be able to recognize if they’re a member without an open trade line. But if we see an open trade line on their bureau with the credit union, that’s actually our go-to first. We’re not a shotgun approach like others in this industry are. Some of the folks in this industry just take an application and they send it out to everybody to see who gets the best loan back. We don’t like doing that. That’s a waste of our resources. It’s the waste of our credit union partner’s resources. So we like to, if they’ve already had that member, they’ve already earned that member and they deserve to have that member back. So we’ll bring that back to them and handle the transaction for them, and no one else even gets a look at it.

[15:13] Vince Passione: Now, we’ve spoken in the past and I’ve seen the operation, retitling is a big deal and we hear various opinions about who does it best. Talk about that process. What does it come into play in your business, and then what’s differentiating about what you do to make sure that you’re retitling the vehicle accurately?

[15:54] Nicholas Goraczkowski: Yeah. Well, like I said, we’ve been around for a long time. We’ve been around for 19 years now, and there are players in the industry emphasis on titling, but like I said, we’ve been around a long time. There’s no auto loan without a title. We’ve always internally maintained our own titles team. Whereas some folks outsource it, we keep it internally. This allows us to monitor the process closely and ensure titles are always delivered accurately on time. We’re set up internally to process in all 50 states with DMVs. Since we
have been along for so long, we’ve got long-standing relationships with many, many, many of the local DMVs and state agencies, and we’re in a position we can navigate them both digitally and physically if that’s needed. And because of our strong track record that lenders that actually turned to us to, hey, can you help us complete our internals that we retitled? Our internal titling, we’re not having much luck at this. Can you help us do this? Which is certainly a service. We offer some credit union partners.

[16:52] Vince Passione: Now, I can’t get off this podcast without talking about AI. So how are you leveraging AI today in the operation, and then where do you see it going forward in your business and helping you become more efficient or changing the customer experience?

[17:06] Nicholas Goraczkowski: Yeah, the AI piece is really something we dove into the last couple of years. When markets slowed down a little bit it gave us a lot of opportunity to dive into
our efficiencies and dive into our processes. We knew the business was going to come back, so we wanted to be ready for it. In that we’ve integrated some AI to the front of the sale with some customer communications, whether that’s some digital experience for the consumer, AI bots, text messaging, we’ve got all those different types of pieces put together. When it comes internally we’ve [inaudible 00:17:38] in AI for verifications. We can now verify with just something as easy as a plate number we can take it all the way down to identifying a borrower in any other vehicles they may have in their home. We can use it to verify income. We can use it to verify any of their loan stipulations, their insurances, their proof of income, their driver’s license, all of that. So it’s really just making the process more efficient. As we move forward we’re looking to use it to, again, use those efficiencies we’ve created and the ability to double our volume that we’re looking to do without having to worry about doubling the volume of employees to do it.

[18:17] Vince Passione: Right. Because the process you followed today, the process of selling the backend product really requires a consultant, a loan consultant to get on the phone with the consumer and talk through the benefits of the product and make sure they’re getting to the right product for them, and that’s also highly regulated. Can you talk a little bit about that piece of it? Because clearly credit unions listening to this would be interested to understand how does the consumer get introduced to those products and then how do you make certain that they’re done the right way?

[18:42] Nicholas Goraczkowski: Sure. So to start with a consumer has a digital experience, we kind of call it our choose your own adventure path. Some consumers really want to do things
online and they just want to be as hands-off as possible. And we give them the opportunity, hey, you can select the products if you want, here’s some videos, here’s some details, some flyers to tell you what the product covers. If you want, you can click here, we can give you more details, and we’ll connect them with one of our loan consultants. If they know what they want and they select it, great. On the phone sale, one thing we do is we’re very, very diligent on our compliance piece of it. Like you said, there’s so much regulation on product sales right now
and that regulatory compliance is always been a top priority for iLending. We take a proactive approach with it to ensure some full transparency and ethical sales practices for all of our product suites. All of our products are presented as optional, number one. A borrower can never be led to believe that this is required for the loan. That is first and foremost, every product is always optional. Borrowers have to be fully aware that purchasing is not a condition of loan approval. And they have to be beneficial as well, we don’t want to put anybody in a product that doesn’t make sense to them. If someone has 50% equity in the car, they’re not necessarily need for 150% coverage gap program. So we want to make sure we align them to the products that make sense to them. So we’ve kind of taken an over-disclosure approach with all our products in breaking down the total cost both monthly and full-term. There are some folks in this industry that, using car lingo, pack the payment. They just simply say, Hey, Vince, great news. Your new payment is X. and in that they’ve already added in all the products and this is included. Well, it’s not really included. The consumer’s paying for that. They need to know that they’re paying for that and they need to know the cost. So we always break it on a monthly as well as a total contract price. We cover it in the presentation. We itemize it on the contracts. We have individual contracts, every product. And we actually have another form that we’ve created that a borrower has to opt in or opt out of every product just to make sure they completely understand what they’re purchasing.

[20:45] Nicholas Goraczkowski: And then on the backside of that, as important as it is to sell these products properly, it’s important to make sure we’re canceling them properly. With all the CFPB regulations, all the regulatory agencies looking at cancellation practices now, we work directly with all of our lending partners to monitor those cancellations and track it. When the borrower pays off, they sell, they trade in their vehicle, if they don’t need that gap coverage anymore, we’re going to proactively facilitate that cancellation and ensure that the eligible refunds are processed within that state-mandating timeframe.

[21:20] Vince Passione: Nic, I’m curious. What happens when the consumer turns around and walks into a dealership? They just refinance with XYZ credit union, they in the dealership,
they trade the vehicle in. How does that process work its way to you or the credit union to do these cancellations?

[21:35] Nicholas Goraczkowski: It depends on the product. Again, the gap would get notified of the credit union because they would know that loan is paid in full, the VSC

[21:46] Vince Passione: Got it. That’s the trigger.

[21:48] Nicholas Goraczkowski: Correct. Yeah. They’ll let us know that, hey, that loan paid off, take care of this cancellation for us, and we’ll jump right on that. On the VSC side, there’s really not as much monitoring on that unless we’re notified by the consumer who purchased it saying, hey, we got that done. Again, if someone is to cancel and they let us know this loan’s paid off, we know in that case. But if they bought a VSC and didn’t have a gap and we have no idea they traded in that vehicle or no idea if they cancel that, we wouldn’t know about the trade for the refund of a vehicle service contract unless they reached out to us.

[22:18] Vince Passione: So there are limits to what the consumer needs to understand what they have to do to make sure these are canceled properly? Makes sense.

[22:27] Nicholas Goraczkowski: The gap we’re always going to be on, but if it’s a standalone product, we definitely  do the consumer help to let us know.

[22:32] Vince Passione: Got it. So Nic, great conversation. So before we close, as you look at 2025, interesting developments at iLending that our audience should know about or your view of the industry that you’re really excited about that you want to share?

[22:44] Nicholas Goraczkowski: 2025 we’re hoping things come around. Like we mentioned, if there’s rate cuts, that’s obviously looking forward. If there’s not, we still got a good opportunity with the folks who are in the market. It’s going to be interesting to see what happens with these vehicle values this year, with all these new tariffs coming into play. All these lease vehicles that are not going to be coming to the market now, there’s going to be some supply constraints again, that could keep the vehicle values a little more balanced out and hopefully increase a little bit, making some affordability issues with lenders as the loan amounts keep going up. So we really hope that’s going to open up the refinance market for consumers as the LTVs come back in line. As competition heats up, of course there’s going to be more and more credit unions offering aggressive rates and refinance programs. So it’s just going to be an interesting year for 2025 with all of our credit union partners and internally, we expect a definite return to the auto refinance market and create profit revenue opportunity for everybody involved.

[23:47] Vince Passione: That’s great. Yeah. Interesting is true, and I think it’s keeping us all on our toes as we try to figure out what’s going to happen next. So that’s a wrap for this episode
of 22 Minutes in Lending. A big thank you to Nic for joining us today and sharing his insights. Don’t forget to subscribe or leave a review and share this episode with your network, and we’ll see you back here on our next 22 Minutes in Lending. Nic, thank you so much.

[24: 09] Nicholas Goraczkowski: Thanks, Vince.

[24:11] Narrator: Thank you for listening to the 22 Minutes in Lending Podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show
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