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With LendingClub poised to raise around $800 million in an initial public offering next week, another online lender is taking advantage of the timing to reel in some serious cheddar of its own.
AvantCredit, a Chicago-based provider of personal loans, said Thursday that it raised $225 million in equity financing and put in place a $300 million credit facility to fuel growth in a rapidly expanding market.
"All of us are excited about LendingClub blazing the path and being the first public company" in the space, said Al Goldstein, AvantCredit's chief executive officer, who founded the company in 2012.
Like LendingClub, AvantCredit lets individuals apply for loans online by answering a few basic questions, and then its algorithms get to work accepting or rejecting the potential borrower and determining the interest rate for those who get approved.
But the products and companies are significantly different. LendingClub, and its smaller rival Prosper, count on other individuals and institutions to provide the capital, while the companies provide the marketplace, do the underwriting and manage the loan servicing.
AvantCredit, meanwhile, issues debt itself and assumes the risk that comes with defaults. That's why it needs to borrow so much money. To date, the company has raised more than $1 billion, with $700 million of it coming in the form of credit. And it's thus far funded $500 million in loans.
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Goldstein said that in the early days, lenders were charging AvantCredit rates in the mid-teens. That's come down by half, and he expects that as the company continues to adequately price risk and keeps losses in the expected range, borrowing costs will fall by another 50 percent in the next couple years.
For consumers, that all translates into lower rates. Currently, loans start at 19 percent annually, but Goldstein sees those prices being reduced at the same rate as its own costs. So consumers could expect to see sub-10 percent loans.
Both AvantCredit and LendingClub are luring consumers saddled with lots of high-priced credit card debt by giving them a way to consolidate and refinance it at more favorable prices. LendingClub goes after prime borrowers (average FICO score 699), and AvantCredit is targeting a slightly riskier consumer (FICO score 600-700).
"We want to be the digital bank for the everyday consumer," Goldstein said. "We're not interested in serving subprime, and our cost of capital won't ever be low enough to serve superprime. The people in the middle make up the majority of the consumer segment and those are the people we want to build product for."
AvantCredit issues loans in the U.S. and U.K., and Goldstein said the company plans to add another country in the next 12 months.
Contributing to the financing was a group of heavyweight investors, including Tiger Global Management, August Capital and Facebook backer Peter Thiel, with the debt facility coming from Victory Park Capital.
The company is attracting big names from the traditional banking sector as well. In July, AvantCredit hired former HSBC executive Suk Shah as its chief financial officer. Shah and Goldstein know each other from their college days at the University of Illinois.
Shah said he wanted to join because he sees where the finance world is headed.
"The new generation is moving to online tech platforms," he said. "It was an opportunity to join a company that has a very innovative model."