Secured Loans Are Coming to P2P Lending

ClickChoice secured peer to peer loans

Jeff Fortin has an idea that may turn peer to peer lending on its head. He is focusing on a huge market niche that hasn’t been very popular so far on Lending Club and Prosper: car loans.

What is even more interesting from an investor perspective is that this company will offer secured p2p loans. They will be the first company to offer secured loans in the peer to peer lending industry. So if a car loan goes bad the car gets repossessed and the investor gets their money back.

The name of this new company is ClickChoice.com and it is expected to launch in beta later this year in Idaho and Washington state. They have developed patent pending technology for their platform that brings together three parties: borrowers, car dealers and investors.

Company founder and CEO, Jeff Fortin, has about 30 years experience in the car financing business. He has also been following the rise of peer to peer lending and decided this was the best model for his new business. And because he is offering secured loans he can provide protection for investors money.

Investors Earn a Minimum of 8%

You may be wondering how on earth something like this will work. You have probably guessed this already but it is going to be a bit different to the Prosper and Lending Club model. Here are some key points that will help explain how it works.

  • ClickChoice will register lender pools with the SEC.
  • The minimum investment for lenders will be $5,000. Initially the maximum investment will be set at $25,000.
  • Investors will fund $5,000 per loan, so an investor can fund a maximum of five loans.
  • Lenders are guaranteed a minimum return of 8% with returns of up to 11% possible.
  • In case of default lenders will always receive their outstanding principal back 91 days after the loan payment due date.
  • Loans will be to low-prime and sub-prime borrowers with FICO scores of 450-650 range.
  • Borrowers will pay 13% – 22% interest rates on a 60, 72 or 84 month term.

So, if you are looking for a $25 minimum investment this model is not for you. Also, if you want to diversify among hundreds or thousands of loans you will be disappointed. But if you want a way to protect your principal then ClickChoice.com has a compelling model. They will actually be insuring every loan so if a default happens an investor will always be made whole whether or not ClickChoice repossesses and sells the vehicle or not.

Unlike peer to peer lenders, ClickChoice will have regional offices throughout the country. Because they are dealing with hard assets they will need people on the ground in many states. Fortin is predicting that by 2015 ClickChoice will be in 42 states serviced by 21 regional offices.

Since peer to peer lending began in this country just 2.4% of loans on Prosper and 5.1% of loans on Lending Club have been used to purchase cars (according to the borrowers stated loan purpose on their application). But every one of these loans was unsecured so if the borrower failed to pay back the loan the lender had no recourse and typically lost their principal. ClickChoice provides protection for the investor.

Over 40 Million Used Car Loans

The auto loan market is huge with 40 million used cars financed every year. The average loan size is $12,000 and these will be the kind of loans that ClickChoice will help finance. No Ferraris or Aston Martins here, the maximum loan size will be $25,000. They will be financing some new cars but the vast majority of their loans will be for used cars sold through auto dealers.

This is going to be a highly complex and expensive operation to setup. Around $500,000 has been invested so far and they are looking to close their first major funding round ($5.5 million) very soon. The biggest challenge as I see it will be getting investor dollars in the door. The demand is obviously there for car loans but the $5,000 minimum investment will certainly limit the number of investors. Fortin is fully aware of that and so he is focusing on several avenues including investment advisors to help drive new lenders.

The last six months has seen a great deal of innovation with several new p2p lending startups getting ready to launch. But ClickChoice may be the most ambitious of all. It has massive potential and I will be following their progress very closely.

  • Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.