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How to Start a Car Finance Company

How to Start a Car Finance Company

You, your car, and the wide-open road. Owning a quality vehicle may be a luxury, but for many, driving is a necessity—albeit a pleasurable one. That’s why, it comes as little surprise to learn that the US car industry—both used and new—is steadily growing, and this presents an opportunity for those interested in getting into the car finance field.

Lending Platforms in Automobile Finance Industry: Auto Lending Trends 2022 In 2021, the value of automotive loan origination grew to $738 billion, up from $616 billion the previous year, and the market is showing no signs of stopping. So, whether you’re considering upgrading your business offerings to include vehicle finance or wondering how to start a car finance company, let’s dive right in and find out why this market is prime for fintech innovators.

auto finance stats USA, 2022

How to start an auto lending company: where to start?

As of 2021, banks hold the greatest share of the car financing market at 33%. They are closely followed by captives at 26%, credit unions at 20%, and specialty finance at 11%, with other lenders making up the final 10% of the market. 

In all these divisions, lending is growing year-on-year. Banks have the highest growth rate at 32% CAGR with credit unions at 25% CAGR. Surprisingly both speciality finance and other are growing too at 18% and 12% respectively, marking an interesting market shift. What this means is that no matter where you are on the how to start a car loan business scale—opportunity is there. The challenge? Identifying market gaps and finding out how to make your company stand out. 

Understanding the market and how to start an auto loan company that leads

Before you kick the wheels in gear on your car loan business, there are a few questions you’ll need to ask yourself.

What type of lender are you?

McKinsey identified four auto financing archetypes. These can help you understand which area your business best fits into. They include: 

  • Formulaic—based on cost and margin impact comes from extra factors, such as inflation, increases, etc., which are then passed onto consumers.
  • Competition-based—balances increasing margins and being competitive on the market.
  • Value centric—seeks to maximize value for the end customer, and delays price rises to deliver value.
  • Premium—targets the premium sector of the market.

Understanding this can help you establish your market positioning so you kick your business off with the value-positioning you want.

What segment do your intent to target?

9 Must-Have Features for Auto Loan Origination Software How to start an auto finance company rule one—know which segment of the market you’re targeting, as how you offer your lending services will differ whether you’re targeting budget vehicles, new cars, or premium rides. 

At the same time, look out for new opportunities, such as electric cars, which continue to grow in popularity, and other evolving technologies. 

Who are your competitors?

Once you know more about your own offering or potential offering, it’s time to take a look at your competitors. Analyze the market to find companies that are similar to yours in size, offerings, and market segment. However, don’t just limit yourself to competing with this grouping, draw inspiration from the wider auto loan market as well. 

What is your unique selling point or market niche?

Whether you have 1 competitor, 100, or 1,000, there will be something that makes your business proposition unique. This may be anything from the specific types of loans you offer to address a market need (for example, ex-pats) to simply a new approach to customer service or even an innovative usage of technology. It is this USP that is likely to help your business succeed in a competitive market. 

How to start an auto finance company: next steps

Now that you have a grasp of how to start an auto finance company your way, it’s time to take the next step and that’s to put your research into action. Based on our research, these are the steps you should consider taking:

  • Developing a business plan—just like any business or part of your business, starting an auto loan segment requires a business plan. Be sure to include the essentials, including an executive summary, description of services, market analysis, competitor analysis, products and services, risk management, financial projections, and growth plans. 
  • Secure funding—this is a crucial element of any venture. To ensure you have sufficient funds to cover operational costs and risks, make sure you are able to secure funding. Consider the different types of funding available, including equity financing, debt financing, asset-backed securities, and government support programs.
  • Regulations—lending is a regulated industry, that’s why before beginning your operations, you’ll need to ensure you have the valid licences and permits in hand to avoid any issues. 
  • Build your team—having the right people on board is critical to your business’s success. Look for an experienced team or consider outsourcing some of the more specific tasks to the experts to get the best results. 
  • Developing criteria and infrastructure—now that you have the basics, it’s time to get down to specifics, for example, what type of loan management tools you will use and how they will serve your clients.
business plan outline

How to start an auto loan company: technology

Speaking of infrastructure, it’s time we talked about technology. Although the automobile industry has been around for a couple of generations now, the way loans are issued has changed substantially. For companies to be successful in the modern market, they need to take note of the past—personalized, in-house services, tailored loans (typical mom-and-pop shops)—and look towards the future. And that future is fintech.

Auto Dealership Financing Software: Guide For Smooth Digital Transformation Now, there are any number of financial technology solutions out there, from fully custom software, out-of-the-box tech, and hybrid versions that offer the best of both worlds. However, when it comes to starting your auto loan company, you need to find the one that’s right for you to be able to implement it successfully and take the market lead. 

Before you begin, it’s important to understand how you want your new product to work and how it will look for your client. For example:

  • Will it integrate into a current product?
  • Are you planning to a standalone lending module?
  • Or do you plan to develop a business from scratch?

Starting from this point, you’ll have some idea of the technology you’ll need or, at least, the challenges you’ll need it to solve. At this stage, you’ll be able to start sourcing an in-house team or seek out dedicated fintech development partners for your project. 

Ready to launch? Here’s how to kick-start a car finance company into hyperspeed

At HES, we have over 10 years of experience in developing solutions for the automotive industry. So, whether you’re a dedicated car loan company, a startup, or a lending business branching out into a new avenue, the first step we recommend is getting in touch with our dedicated team, who’ll walk you through the process of how to get the right start for your car lending business.

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