Auto Financing

Automobile financing market is only second to mortgage financing in terms of size and volume. Most American adults own or lease an automobile for work, school, family and personal usage. The US automotive sector and consumer market is one of the world's biggest and it's continuing to grow. Automotive financing is mostly done at the showroom or dealership but some newer fintech companies are giving the American consumers a chance to get approved online to understand their buying power before test driving their favorite brands.

What is automotive financing?

Automotive financing is where an automotive purchase is paid over time by the buyer. The financing company pays the dealership and the manufacturers and the individual or entity buying the automotive will pay the financing company over time. Almost all of the automotive purchased in the United States are financed.

Who is in the business of financing vehicles? 

Captive financing

Captive financing means that the car manufacturers themselves are financing the purchase of these vehicles. For instance, a major Japanese automotive manufacturer Toyota sells one of their vehicles, the Toyota dealership staff might introduce the buyer to their finance department and Toyota Financial Services, a subsidiary of Toyota Motors will have a slew of products available for qualified buyers.

Because the manufacturers themselves are financing these cars, the cost of financing for Toyota is automatically lower than if they are using a third party financing company. Therefore, Toyota can pass these savings to the consumers and make the car purchase more affordable. Most of the large automotive manufacturing companies have their own financing arm to make it easy and affordable to the buyers and thereby sell more cars.

Non-Captive financing

Smaller car manufacturers or new car manufactures such as Tesla, Fisker, are using third parties to fulfill that role. These car manufacturers will work with national banks to construct various financing products or programs and offer them to their clients to make their car buying experience a little easier. These banks are essentially borrowing money from the federal government based on their depository volume to lend to individuals that are interested in these cars.

The banks incentive is the make a spread on their car loans and can’t afford to give out too much discount unless they work with the manufacturers to offer special promotions. The manufacturers or dealerships however will always use a water-fall method to essentially get multiple offers from multiple banks or financial services companies to let them compete for their customers. This competition keeps their loan’s amount, term and interest rate relatively competitive as offered by captive financing alternatives.

Buy here, pay here and subprime lenders

Even though the automotive loans are backed or secured by the cars themselves, there is still a good amount of credit risk captives and banks must consider. Missed payments on a car loan requires special servicing which is costly to the manufacturers as well as banks to deal with. Worse, third party collections agencies as well as repossession firms will need to be hired to repossess the vehicle. With that said, if the consumer is not “well qualified”, they may have to seek out alternatives and new cars might be out of the question for many Americans or immigrants that didn’t have a chance to build up their credit.

Subprime lenders tend to work with used car lots, used cars are cheaper relatively speaking and it's more affordable. These subprime loans and their underwriters are a little more flexible as well in terms of qualification. Some of these lenders are betting their clients to go into default so they can repossess the vehicle and sell them again on their lot.

Automotive financing fintechs

One of the biggest inefficiencies is that the buyers aren’t qualified to purchase the car that they want either due to their creditworthiness or their debt to income ratio. When they spend an hour or two kicking the tires with the car salesperson, their finance department can’t find a suitable financing product for the buyer. A lot of time is wasted from both parties. Even though these buyers have intent to purchase, their ability to buy isn’t there.

FinTechs in the automotive sector have technology and marketing skills that can help dealerships to qualify these leads before they come in. There are companies such as TrueCar that prequalified the buyer to make sure that they have the purchasing power needed to actually buy the car before they goto the showroom. The dealership pays a lot of money to TruCar for these qualified leads because the dealership knows that this buyer has intent to purchase and the qualifications to finance.

DTC - Direct to consumer

Another car buy model that’s becoming popular is dealership-less model where the consumer makes the purchase decision and get their car delivered or picked up from a central warehouse. Carvana for instance runs a nationwide dealership-less or dealership-light purchase model. Consumers browse through thousands of vehicles nearby, make their entire purchase experience and decision online then goto a Carvana car vending machine to pick up the car.

By cutting out expensive dealership models and catering to the customer’s intent-to-purchase as well as ability to pay, Carvana is able to pass the savings down to their customers and offers unique features such as 30 day no hassle return guarantee or swap for another car free of charge (for a few times).

Auto Finance: Tech stack expalined

Automotive financing is complex because it involves an asset. The asset in this case is the vehicle itself. The asset has a market value or MSRP but it also carries residual value depending on the make, model, year and mileage on these cars. The old adage of “as soon as you drive the car off the lot, it’s worth 40% less” applies here. 

Your shiny new car is financed at $40,000 with a $5,000 down payment, it may be worth $30k as soon as you drive it home, because it’s no longer a new vehicle. Taking into account the cost to service these loans and worse, cost of repossession, these lenders must consider all of these aspects of the transaction and make a determination of how much financing they are willing to grant the buyers before handing over the keys.


Captive financing is a little bit straightforward. The financing manager will punch in the information of the car as well as he buyer’s information and run a consolidated decision on the equity value of the car, the creditworthiness of the buyer as well as his or her debt to income ratio to come up with a few options. Most of the car buyers care about the monthly payment amount. To lower the monthly payment amount, the finance manager may focus on longer term loans such as a 60 0r 72 months loan.

The other way to lower the monthly payment is to ask for a larger down payment, but the buyer may not be too thrilled with that idea. Either way, the application, decision engine are all internal facing, meaning that the finance manager plays around with numbers in their system to come up with a suitable option for their buyer.


If the dealership uses one of two major car dealership financing systems, these systems are already connected with a variety of different banks and financing companies with an auto loan program. Depending on the type of car, the value of the car, the creditworthiness of the buyer, these systems will waterfall the buyers information to all financing companies willing to process their application and return an offer.

Just like the captive financing system, the consumer doesn’t get to see what’s really happening behind the scenes and the dealership’s financing manager will go through the cost of the loan, the term of the loan and how downpayment may affect the other characteristics of the loan with the buyer. The buyer makes a choice to complete the purchase.


Direct to consumer car purchase models and some of the EV (Electric Vehicle) manufacturers financing models are more customer facing. The customer is in the driver seat when it comes to picking their financing options. They either go onto a website such as Carvana or interface with the EV manufacturers website and browse their financing options directly without the influence of a finance manager at the dealership. This model gives consumer transparency and choice. 

Private Lenders:

There are many private lenders that own their financing company as well as dealerships. These private lenders form a closed looped ecosystem where they buy, sell, lend and service all of their cars. These entities sometimes have their own customized tech stack or lease a technology platform to do variety of tasks, specially in financing

LendAPI Custom Lending Software:

LendAPI offers a fully customizable product builder which allows our clients to build any type and any number of application flows and products. Private auto lenders can design their application flow and require documents to be uploaded all in one smooth customer experience. LendAPI also offers a sub-tenant management system where each sub-tenant can be a dealership location where they can onboard their own clients with their own unique URL.

Check our LendAPI at and sign-up for our 30 day free edition at



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© 2024 All rights reserved



© 2024 All rights reserved