You can newly invest in car loans of the Lithuanian company Autofino, which provides financial leasing, on Bondster. How does lending money for car purchases work, and what is Autofino‘s position on the market? We asked these and other questions in an interview with the company‘s CEO Rokas Ignotas.
Could you please describe your risk management policy and related procedures?
Each client risk is evaluated quantitatively taking into account the credit history, current financial obligations, the level and type of income and information about the vehicle. In addition, qualitative analysis is performed to reject clients on more subjective factors such as social media profile, possible crime history or information they chose to withhold. The sales managers are incentivized to originate high quality contracts by including the level of defaults into the remuneration formula.
Each vehicle is priced independently from the seller’s asking price according to the in-house pricing methodology in order to make sure that the collateral is liquid and sufficient to safeguard the contract.
At origination, we are able to reduce the risk by demanding down payments or third party guarantees, installing a GPS tracking device on the vehicle, increasing the interest rate and shortening the length of the contract.
Each existing client is getting regular automated reminders about upcoming and missed payments by text message, email and telephone. In addition, the team regularly contacts them in person to make sure we are able to reach them, up to date with their financial situation and to agree on debt repayment schedule.
We aim to repossess the vehicle when the client falls 60-90 days behind the payment schedule. In certain cases we may choose not to cancel the contract if we agree with the client on a debt recovery schedule and we have reason to believe that the client will honor the agreement. In case the client refuses to return the vehicle voluntarily, professional vehicle repossession services are hired.
Our partnership with second hand car dealers enables us to sell the repossessed vehicles or re-lease them to new clients.
Any debts outstanding are outsourced to debt collection agencies.
What kind of clients do you focus on? What is the average interest rate on these loans?
We focus on clients who do not have access to traditional financing services. There are 5 main categories of clients:
• People working abroad. Even though they earn high wages, their foreign income is difficult to access for debt collection.
• Sole proprietors, who operate in cash-dominated industries (e.g. hairdressers, construction workers). Their income is volatile, not socially insured and more difficult to verify.
• Minimum wage earners. They tend to have a minimum base salary and earn additional income as expense allowance, travel money or sometimes unaccounted cash in order to reduce the tax bill.
• Small businesses which lack high quality collateral (e.g. real estate) to receive bank funding.
• People with a bad credit history. Last decade saw an explosion of consumer credit and pay day lending. As a result, there are a lot of risky borrowers that traditional lenders are wary of.
The effective interest rates range between 30-60%.
What is your USPs and competitive advantages?
The key USP is that we offer financing for affordable cars to underserved clients. Traditional car leasing services are only available to new cars while traditional car loans are only available to clients with stable insured income and good credit history. We are able to service these clients because our contracts are secured by vehicles and less risky as a result.
We compete by being nimble and flexible at very competitive prices which we are able to achieve as a result of our efficient and lean operational structure. As a small team we develop more personal relationships with our prospective and current clients. We represent a relatively new brand with no bad publicity attached to its name as opposed to biggest players. Coupled with our network of selected car dealers we function as a one-stop shop for ready-to-use cars at low-to-none initial cost.
What is your position on the market?
We are the third biggest originator in this particular market segment. We estimate the market size to the amount of EUR 1.5 mn per month and our market share is ca. 5%.
What opportunities people have to borrow money and what is specific for them? What’s share of lending from the banking and non-banking sector?
There are four distinct groups of companies which finance different groups of customers at different interest rates. Bank lending is the cheapest source of financing which is only available to highest quality borrowers. Secondly, there is a group of non-bank lenders which finance somewhat higher risk customers at higher rates. This group also includes P2P lenders. Autofino belongs to the third distinct group of companies which finance cars and other household goods through secured contracts to higher risk customers. The fourth group is pay-day lenders which offer the most expensive form of financing.
Is lending in your country subject to any regulations? Which ones?
Traditional consumer lending is regulated by the Lithuanian consumer credit law. It is a piece of legislation designed to protect consumers which outlines:
• allowed forms of marketing and mandatory public information
• client eligibility by limiting the type and level of income vs liabilities
• pricing restrictions: <75% annual interest rate
• consumer rights
• lender’s duty to collect and submit personal data to centralized database
Leasing contracts that do not carry an obligation to purchase the leased object are exempt from the regulation.
Have you been affected somehow by covid-19 pandemic? How did you cope with the situation?
Our company has been affected by covid-19 in a very moderate way. The first quarantine in Lithuania has been announced on 16th of March in 2020 and we entered this period of uncertainty well prepared.
We managed to cut down our costs by approx. 50% by negotiating discounts with our service providers and switching employees to a part-time schedule. As a result, our cash inflow exceeded the cash outflow by 8 times on a monthly basis. Liquidity is a key risk to our business model, and we have demonstrated that we are able to accumulate a significant liquidity buffer.
In addition, the government has responded to the crisis with significant fiscal stimulus in the form of wage subsidies and emergency loans for businesses. This has reduced the number of bankruptcies and the spike in unemployment rate. As a result, our income remained fairly stable while our costs dropped even further due to the subsidies received.
Finally, as the demand for second hand cars remained fairly healthy and the supply from Western Europe (Germany, France, Italy, etc.) got cut off completely. This led to a very quick recovery of car prices to pre-crisis level and in some cases even higher.
Currently we are at the end of the second wave of the pandemic. We have managed to operate the business as usual during the second wave. The sales and portfolio quality remained stable, while the interest income collection worsened very slightly in the first 2 months of 2021.
You can find more information about the company HERE.
About Rokas Ignotas, co-founder & CEO
Before starting autofino.lt, Rokas has spent 8 years in global macro hedge fund industry in Monaco, Malta and London as an analyst and a trader, with a focus on data-driven investment and risk management strategy.