The purpose of an auto finance company is to provide individuals with the funds necessary to purchase a car. The borrower then pays back the amount of the loan, plus interest, to the finance company. A finance company's profits come directly from interest charges and any late payment fees a borrower accrues. Individuals with bad credit are much more likely to seek financing through a finance company rather than a bank. Banks are unlikely to extend financing to bad credit buyers, not just because of the higher risk of default, but because of the extra work that comes along with recovering lost funds and repossessing vehicles. A finance company for bad credit buyers can be a lucrative business venture if you take care to market your business in a way that will attract customers and establish loan recovery procedures ahead of time.
Things You'll Need
- Tax ID number
- Business license
Gather the necessary capital to start your business and get your paperwork in order. You will need a substantial start-up fund since you will be loaning money out for quite a while before you begin to see a profit. A small business loan or line of credit through your bank is a good option. You must also obtain a license to conduct business in your state and apply for a tax identification number for your finance company through the IRS.
Market your services to car dealerships that may be willing to refer their customers to you. Your first stop should be small used car dealerships. Small dealerships are less likely to have the financial overhead to service their own loans, and they often work in conjunction with a local finance company. More partners means more profits.
Draw up a risk management model. A risk management model is a chart containing how likely a customer is to pay his loan based on his credit score. A finance consultant or computer program can keep your chart updated with the current interest rates. This will help you offer accurate rates to customers based on their scores. The higher a customer's lending risk, the more interest your finance company can charge.
Consider defaulted loans ahead of time and plan accordingly. When doing business with consumers who have bad credit, the prospect of defaulted loans is a much larger risk. Interview companies in your area that handle vehicle repossessions. The ideal repossession company will charge reasonable fees and do the work of tracking down the debtor for you. The car dealers you are allied with will probably be more than happy to purchase back the vehicle. If the car loan was close to being paid in full, this may even net you a small profit.
Hire an attorney who can draw up your legal paperwork such as contracts and repossession notices. You must meet certain legal requirements when repossessing vehicles. If you do not conduct repossessions properly, the borrower may have recourse to recover the car and sue you for damages. It is vital that you successfully navigate the legal red tape involved, and its best to allow an attorney to take care of this for you, lest you risk making mistakes.
Apply for membership in the credit bureaus' reporting program. Reporting your customers' loans to the credit bureaus is important because your customers expect that a good payment history will be rewarded. If you have no method of rewarding their good payment behavior, they are very likely to refinance and this will cut into your future profit margin. Membership in the reporting program is free, but you will have to pay a $75 fee for a business evaluation and purchase your own reporting software.
Advertise your willingness to finance bad credit buyers. A large percentage of your clientele will come directly from the dealerships you are working with, but you can attract more customers by marketing your business via the radio, print media and the Internet. If you can afford it, you may even consider filming a local television commercial.
Be patient. Because you are the loan servicer, it will take longer for you to see profits from customers. Used cars are cheaper and thus turn a profit for finance companies much more quickly than new cars. By partnering with the right dealerships, you could begin to see a profit in as little as two years and maybe even less.