I recently initiated a new position in this fintech company, a company that went public through a special purpose acquisition company (SPAC) toward the end of 2020 and began trading on its own in July. OppFi (NYSE:OPFI) is attempting to revolutionize lending in the subprime credit space, which caters to riskier borrowers, typically with a FICO score below 600.
While investing in this space will undoubtedly come with risk as well as scrutiny from regulators and investors, I do like OppFi’s mission and strategic plan so far, and believe the stock has huge potential. Here’s why.
Shaking up the subprime space
OppFi uses artificial intelligence and automation to make small-dollar loans to individuals who normally can’t get loans with a traditional bank. The company’s main product, the OppLoan, is an installment loan that has an average loan amount of $1,500 over an 11-month period, and is used by borrowers to deal with situations that relate to car trouble, housing, medical bills, family, and education.
Borrowers can apply for a loan in five minutes and get a very quick decision on their application. OppFi is seeking to serve the 60 million borrowers who lack traditional access to credit. OppFi defines its customers not as low income, but as those who typically make $50,000 per year and have a bank account, but are living paycheck to paycheck.
From everything I’ve seen so far, OppFi is committed to providing fair services to a subset of the market that cannot get credit when they need it. On the company’s second-quarter earnings call, CEO Jared Kaplan noted that about 40% of its customers have bank accounts at the three largest banks in the country, but can’t get access to small-dollar loan products.
OppFi actually assesses a person’s credit quality and will hand the business off to a near-prime lender if that person qualifies. However, Kaplan said that fewer than 2% of customers who come to OppFi end up qualifying.
To be clear, OppFi is charging a very high annual percentage yield (APY) on OppLoans in the range of 30% to 160%. However, in the subprime space, this is actually toward the lower end of what other subprime lenders charge. OppFi also does appear to preach transparency, as its loans do not charge late fees, overdraft fees, or prepayment penalties. The APY that borrowers see is what they get.
Now, I can understand that OppFi’s APY is not exactly cheap, but the thing people need to understand is that small-dollar loans are hard to originate because they still carry many of the same fixed costs required to originate a normal loan. Additionally, given the nature of subprime borrowers, OppFi is still writing off 25% to 40% of its loan balances, which is obviously very high, so the company needs to price the risk appropriately.
However, there are two reasons that make me confident in OppFi’s mission. First…
Continue reading at THE MOTLEY FOOL