Until recently, the boom in online consumer lending was fueled by credit-hungry borrowers who did not have to put their own assets at risk.
But a recent move by one of the digital lending industry's largest players signals a notable shift toward secured lending.
Chicago-based Avant said last week that it has started refinancing auto loans, and will give qualified customers the option to pocket some cash as part of those transactions. Applicants who previously got rejected by Avant may now be able to qualify, since the lender will have the ability to repossess their cars if they stop making payments.
"Not everyone is really qualified, from a credit perspective, to get an unsecured $8,000 personal loan," said Adam Hughes, Avant's chief operating officer. "We're declining 70% of customers today for that unsecured personal loan."
Avant, which has issued $2.8 billion in unsecured U.S. personal loans since late 2012, lends to borrowers with lower average credit scores than other online firms like Lending Club and Prosper Marketplace.
The company's auto refinance product is now available in California, and is expected to be rolled out nationwide by the third quarter of this year.
Avant is currently refinancing auto loans at annual interest rates ranging from 9% to 20%, though the company plans to drop the lowest rate to 6% soon, according to Hughes. Those rates are extremely high for auto loans; nationwide, 60-month new car loans from commercial banks carried average interest rates of 4.05% in November, the most recent month for which Federal Reserve Board data was available.
So Avant's auto refinancing product may appeal more to consumers who need cash right away, and are willing to use their vehicles as collateral, than they do to those simply shopping for a better deal on their car loan.
Cash-strapped consumers may also find the loans more appealing than car title loans, which can often carry triple-digit interest rates.
Refinancing a car loan and taking out cash in the process is probably not advisable for most consumers, since the loans carry high interest rates. Unlike houses, where a cash-out refinancing may be easier to justify, cars are depreciating assets.
But a lender's calculation is different. Even if the value of the car does not cover the entire loan amount, the lender can recoup some of its losses by repossessing a vehicle, which is not true for an unsecured personal loan.
In addition, borrowers who know they will lose their cars if they stop paying have a strong incentive to stay current on their loans. Without a car, it is impossible for many Americans to get to work.
"If I can threaten to take your car, you're going to pay me before anyone else," said Nick Clements, co-founder of the comparison-shopping site MagnifyMoney.
Avant is not the first lender to offer cash back to consumers as part of a refinanced auto loan.
Wells Fargo and Santander Consumer USA both offer versions of such loans. San Francisco-based Wells advertises that its customers have received an average of $5,800 to $10,700, depending on which specific product they use.
OneMain Holdings, based in Evansville, Ind., also offers cash-out refinancing of auto loans. The company, which is the offspring of Springleaf Holdings' recent purchase of Citigroup's OneMain Financial unit, competes head-to-head with Avant in the subprime consumer lending market.
As of the end of last year, the former Springleaf had nearly $1 billion in auto loans, according to a recent regulatory filing. An additional $2.4 billion in personal loans were secured by titled personal property, primarily automobiles, the company stated.
The combined OneMain, which has nearly 2,000 branches nationwide, is currently looking to build its digital lending capabilities. At the same time, Avant, which operates exclusively online, is taking a page from the lending strategy long used by its branch-oriented competitors by offering secured loans.
"I do think this will bring more competition for OneMain," Michael Tarkan, an analyst at Compass Point Research & Trading, said in an email.
Between 2011 and 2015, unsecured personal loan balances across the financial industry grew from $45.9 billion to $82.5 billion, according to TransUnion. At the end of 2015, the average consumer was carrying $7,235 in unsecured debt, up roughly 22.5% from four years earlier.
Secured loan balances grew more modestly, from $153.9 billion to $165.5 billion, during the same four-year period.