For years, banks have wondered how to participate in the rapidly growing business of unsecured lending to consumers in need of quick cash. A pillar on rue LaSalle has just found a way.
BMO Harris Bank, Chicago’s second-largest commercial bank, has agreed to loan $ 25 million to OppLoans, a Chicago-based online consumer lender. This will allow OppLoans, through its long-standing partnership with a separate online bank, to provide an additional $ 200 million in loans, the company said.
Revolving credit facility is a major boost for OppLoans, which provides one-year installment loans of around $ 1,500 on average to consumers with poor credit at rates well above what BMO Harris charges to its own customers.
OppLoans, founded in 2012, has quietly grown into one of Chicago’s leading internet consumer finance companies, generating lending volumes comparable to those of better-known rivals like Avant. Jared Kaplan, CEO of OppLoans, calls the deal with BMO Harris a milestone.
He and others in the industry know little about other commercial banks funding online lenders who take on the important but controversial role of making cash available to consumers who suddenly need it due to unforeseen costs and including credit. Tarmac offers more conventional options like credit cards or unavailable bank loans. “Usually to fix a car or pay a doctor,” Kaplan explains in an interview.
Most of the many web-based lenders that have sprung up since the US economy began to emerge from the Great Recession have relied on non-bank finance and venture capital to fuel their operations, which provide non-financial loans. guaranteed to consumers who apply online and get answers in-house. minutes.
Abundant but expensive, non-traditional financing is one of the factors behind the exorbitant consumer loan rates. OppLoans interest rates range from 59% to 160%.
“We try to be the best option when the traditional financial system lets you down,” Kaplan says. The consumer OppLoans serves has few alternatives, he says. “We are the best option when Avant refuses you.”
For its part, BMO Harris downplays the revolutionary nature of its relationship with OppLoans. “We are not venturing into a new space at all, as we have been actively providing loans in the installment area to consumers for decades,” spokesman Patrick O’Herlihy said in an email. “The channels may have evolved – online in this case – but there is nothing new here for us.”
Indeed, physical businesses have been providing high rate unsecured consumer loans for decades. But the purely digital version is different; online businesses have dramatically simplified the approval process and increased loan volumes. O’Herlihy acknowledges that this is the first exclusively online business that BMO Harris has funded.
In some ways, it’s no surprise that BMO Harris doesn’t want to break the news. Traditional banks do not like to be associated, even indirectly, with such high interest rates.
Bankers also feel they have been burned in the past by regulators who encourage legacy banks to help the growing number of American households living on a paycheck to pay and vulnerable to unforeseen costs, however small, just for the sake of it. punish banks when these types of loans deteriorate during financial downturns.
Lending to the lender, rather than the consumer, may well be a better – or at least safer – way for these banks to participate.
Chicago-based Enova International has a digital offering called NetCredit, which it sees as its main growth engine and has started advertising on national television at sporting events. Enova has relied on large financial services firms for funding for years, but the lenders have been investment banks like Jefferies and Credit Suisse rather than more risk-averse investment banks like BMO Harris.
“You will see more banks financing installment loans with higher interest rates,” predicts Enova CEO David Fisher.
Likewise, Kaplan has little doubt that other companies like his will find traditional backers.
The fact that BMO Harris started with obscure OppLoans becomes more understandable when you look at the growth of the company. It will grant nearly $ 1 billion in loans this year, Kaplan says, more than double its volume last year. He says the company, which employs 425 people in Chicago, is profitable, using generally accepted accounting principles.
To put that in context, Avant, which was valued at $ 2 billion four years ago during its last equity financing, is expected to lend around $ 1.1 billion this year. At its peak of growth four years ago, Avant’s volume was roughly double.
Avant, which lends to consumers with slightly better credit scores than OppLoans, is still losing money seven years after its founding. But it became profitable at the end of 2018 if one-time items and investments in its nascent credit card business are excluded, according to a Sept. 18 report from the Kroll Bond Rating Agency.
Avant has partnerships with banks – notably Regions Bank, a major player in the South East – but these agreements essentially allow banks to use Avant’s technology to make their own loans to consumers with much better credit than those to which Before ready.
This story has been corrected to provide the correct amount of BMO Harris loan to OppLoans.