Based in Dallas, Texas, DriverUp is an online marketplace for automotive financing. It’s powered by Sierra Auto Financing, which is a nationally recognized specialty auto finance company. DriverUp is the first platform that specifically allows investors to participate in the auto lending market. DriverUp works similar to peer-to-peer (P2P) lending platforms, such as Lending Club and Prosper, but it’s closer to crowdfunding since it specializes in one type of financing. Also, the loans are prefunded, with lenders buying in after the fact.
The platform brings car buyers, car dealers and those who want to invest in auto financing loans together on one site to streamline the entire process.
DriverUp employs user-friendly technology built on proprietary software and advanced data analytics. The process focuses entirely on the transaction and the securitization of specialty auto loans.
The company, a subsidiary of Sierra Auto Finance, got started in 2012 and actually launched the lending platform in February 2015.
How Does DriverUp Work?
DriverUp works to serve three groups: car buyers, car dealers and investors.
DriverUp works to empower drivers with a “smarter car shopping and finance experience.” By creating a combined car search (they have hundreds of participating car dealers) and loan application experience, it gives more control of the process to buyers. Essentially, the buyer finds the car that he wants to purchase — and the financing to buy it — on the same platform.
The buyer is able to shop and transact business from the comfort of their own home, with none of the buying pressure that typically comes with working with a car dealership.
The car buyer applies on the platform using the DriverUp online consumer credit application system, which speeds the loan process. The buyer enters their credit information directly on the platform, then the application is priced, and a loan decision is made within minutes. The buyer is notified of the terms of the loan, and the DriverUp team is available for assistance.
DriverUp partners with dealerships, providing selling advantages to the dealer at no cost. DriverUp provides qualified leads of motivated buyers (the car buyers come to the platform) who have been approved for certain vehicles. The dealer then has direct access to the information and needs only to set up an appointment for the pickup of the vehicle.
Dealers can list their inventory in the DriverUp system for free, and buyers select the vehicle they want and apply for financing. This enables dealers to expand their market. Meanwhile, investors on the platform compete to buy funded loans, which pushes the marketplace to offer better loan deals to buyers.
Investors are able to invest in loans specifically on automobiles. They are able to track the performance of their portfolios and increase return on investment with manageable risk. This gives investors an opportunity to invest in the $1 trillion auto finance market that’s historically been reserved for banks and institutional investors.
DriverUp displays a wide range of loans from dealers for you to choose to invest in. You can review each loan with easy-to-use search tools, then choose which ones you want to invest in. DriverUp enables you to see your portfolio and the progress of the loans right on the platform.
Investors can also see the details of all loans available for purchase. The platform provides data from current inventory, as well as historic data for comparison purposes. Investors must purchase whole loans, not notes (slivers of loans) as is typically the case with P2P lending platforms.
Loans are concentrated in the used car market, since loan pricing on new cars has become extremely competitive. Average borrower credit scores run around 535, as DriverUp largely serves the subprime car market. However, this also serves as DriverUp’s strength in the market — other P2P lenders typically don’t provide loans to borrowers with scores below 600, if they’ll even go that low.
All loans are prefunded, then investors choose which ones they want to purchase for investment.
Features and Pricing
- Minimum Deposit — The minimum is $100,000 to open an account with DriverUp
- Type of Accounts Available — Currently the only type of account available at DriverUp is a taxable investment account. IRA accounts cannot be accommodated.
- Annual Fees — DriverUp charges an annual service fee of 4% of the loan balance and applies the pro-rated fee each month.
- Loan Underwriting — All loans are underwritten and verified as if they were to be held by DriverUp directly. The investor only has to select the loans that he or she wants to invest in.
- Investment Yields — DriverUp reports historic yields of between 7% and 9% across multiple economic cycles. The platform’s rates start at 8% and go as high as 24.95%, based on borrower credit quality.
- Loan Security — All loans made by DriverUp are secured by the automobile the loan was used to purchase. In the event of a loan default, at least part of the loan proceeds would be collected through repossession of the vehicle. This is a big advantage over other P2P platforms that typically provide unsecured loans.
- Automatic Servicing and Monthly Distributions — The platform will handle all of the servicing of the loans, including collection of monthly payments. They will make monthly distributions and deposit them directly into an account that you designate.
- DriverUp Loan Book — This gives investors the ability to focus on specific auto loan niches, such as certain makes and models, or even based on specific geographic locations. This will help you to further pinpoint the types of loans you want to invest in, based on your own criteria and preferences.
- Secured Loans — Unlike P2P loans, which are generally unsecured personal loans, DriverUp loans are secured by motor vehicles, enabling the return of at least some capital in the event of borrower default.
- Higher Returns Than Other P2P Platforms — P2P lenders like Prosper and Lending Club don’t have specific loan programs for auto financing. Instead, they offer unsecured personal loans that can be used to purchase an auto – at rates as low as 5.9%. DriverUp offers secured auto loan rates that start at 8%. That means that both the rate of return and the security for the loan are superior to what you can get for an "auto loan" with other P2P platforms.
- Untapped Market — P2P lending is spreading into every conceivable market niche. You’ll be on the cutting edge of auto financing from a P2P standpoint. Though it may be new in P2P, auto financing itself has a long and well-established history. This is an opportunity for sophisticated investors to get into a previously untapped investment market.
- Accredited Investor — This means that you must earn at least $200,000 per year ($300,000 if you’re married) or have a minimum net worth of at least $1 million, exclusive of your primary residence. That will eliminate most investors from participating.
- High Minimum — The $100,000 minimum will eliminate small and many midlevel investors, for whom the minimum would claim a disproportionately large share of the total investment portfolio.
- Whole Loans Only — You must purchase the entire loan. This will make it more difficult to spread your investment capital across hundreds of loans, as is the case with other P2P platforms. For example, by buying whole loans, you may be able to invest in only ten loans with a $100,000 investment.
- No Liquidity — There is no secondary market. Investors are expected to hold on to their loan investments until the loans mature and are fully paid off.
- No IRA Availability — DriverUp offers only taxable investment accounts at this time and has no provision for individual retirement accounts.
- New Investment Model — Since it’s been active for only a little over a year, there isn’t a deep history to fall back on for reference purposes, though the platform obviously benefits from its affiliation with Sierra Auto Financing and their lending experience in the auto lending market.
DriverUp is certainly offering investment in an asset class that is new and exciting. P2P is already well established in unsecured loans and is also segmenting into more specific loan types, such as real estate, business loans and student loans. The extension into the auto finance market is a natural progression.
However, auto financing through P2P platforms is still in its infancy and represents a serious risk. This is not an investment for the average person and certainly not for small investors. This is why the platform has requirements for accredited investors with a minimum account balance of $100,000. It is best suited for high-net-worth individuals and those with both the appetite and understanding of the risk that they are undertaking.
A major negative aspect of the service is the 4% service fee. This is substantially higher than the 1% that is typically charged on other P2P lending platforms. Another issue is that you are required to purchase whole loans, rather than notes that are part of whole loans. This will make extensive diversification unworkable unless you have a very large investment portfolio.
However, DriverUp does score points for the fact that the loans are secured by the automobiles they are used to purchase. This provides collateral, which is also unusual when it comes P2P lending. You are far less likely to lose your entire investment in the event of borrower default.
DriverUp will probably work best for a high-net-worth individual, who is prepared to put a very small percentage of their portfolio into the platform. Based upon the annual fee and net worth requirements, we do not recommend this service for most individuals. We would recommend Prosper or Lending Club who do offer smaller investment requirements and offer unsecured auto loan notes. While these two are not exactly the same as DriverUp’s service, we suspect the 4% annual fee will be a steep hurdle to overcome.