You plan to start a consumer loan business, and you’re wondering how to do it.
The first thing you need to do is research the industry. There are many different types of consumer loans, so take a look at what your competition offers: payday loans, installment loans, car title loans, online lending, and storefront lending. Each one of these loan products and business models has its advantages and disadvantages.
Research the industry.
The first step in creating a successful consumer loan business is researching the industry. This will give you an idea of what’s going on and where you fit in. Here are some things to consider:
- What is the overall state of the industry? Is it growing or shrinking? [HINT: It’s growing big time!]
- What are some of its most significant challenges and opportunities? How does this compare with other industries with similar products (e.g., mortgage lending, auto financing)?
- Who are your competitors, both locally and nationally? What do they offer their customers that makes them different from one another? Why do consumers choose one over another if they all offer roughly the same products/services at similar prices/fees/interest rates etc.?
- Is online lending taking market share from storefront lending? Should you offer both?
- Which states are most conducive to offering the loan product(s) you plan to provide?
- NEVER forget! A lender’s inventory is M-O-N-E-Y! It’s not bananas! It’s not doughnuts! It’s not $100,000 pieces of equipment! YOUR inventory does not rot, evaporate, set on a cargo ship for months, or become obsolete. [However, inflation is causing consternation!]
[NOTE: Our Manual, “How to Lend Money to the Masses,” answers all these questions and much, much more.]
Payday loans
Payday loans are short-term, small-dollar loans that borrowers promise to repay when they receive their next paycheck. The average payday loan principal is $385.00 Payday loans are not a long-term solution to financial problems; rather, they should be used only when your borrower has no other options.
Payday loan profits come from high-interest rates and fees that often exceed 400 percent per year on average. FTPD (First-Time Payment Defaults) rates for payday loans can reach upwards of 25 percent. This is why it’s critical that payday loan lenders employ the various underwriting tools discussed in our Manual: “The Business of Lending to the Masses.”
Several states have issued regulations severely limiting or outright banning payday lending practices (although federal regulations have yet to catch up). For example, some states require that lenders verify a borrower’s ability to repay the loan before granting it; others limit how many times in succession a borrower can take out new loans, and still others cap interest rates at a 36 percent APR or less (with most of these states falling between 28% and 36%).
Installment loans
An installment loan is a type of loan that involves the borrower paying back a fixed amount at regular intervals. The borrower is usually required to repay the loan using a set number of monthly payments, although some installment loans have longer terms and higher interest rates than others. Some installment loans have balloon payments. [Depends on the state.] Although most installment loans are used by individuals to purchase goods or services, they can be used for other purposes.
The benefits of an installment loan for consumers include the ability to access funds quickly without waiting until payday, loan applicants with terrible credit are approved, no need to attempt to qualify for a bank loan because banks don’t serve the 60+ million households with poor/zero credit.
Of course, there are some disadvantages to installment loans, too: they may cost more than other types of personal debt (such as credit cards) due to the high-interest rates charged by lenders who offer these types of financial products.
Car title loans
Car Title Loans:
Car title loans are a form of a secured loan, a collateralized loan. They are also known as auto title loans or vehicle title loans. Lenders specializing in these types of lending loans based on the car’s value. The interest is higher than most other forms of consumer credit because they are risky businesses with high default rates. However, from a lender’s perspective, car title loans experience much lower default rates than unsecured loans like payday loans and installment loans.
Online lending
Online lending continues to experience significant growth. The opportunity to lend to people with poor or zero credit history is a promising one, especially when you consider 47% of US households earn less than the poverty _ “a livable wage.” [This situation is hard to stomach! In America… But it’s a horrible fact!
However, there are challenges with online lending too. For example, if you want your business model to scale, then it must work offline as well as online because many consumers desire good old-fashioned face-to-face interaction when making financial decisions. Know that this mindset is changing RAPIDLY. Companies like Curro and Enova typically lend nearly $100 million dollars each per month in payday loans, car loans, and installment loans!
A storefront lending business is one where borrowers can apply for a loan at a physical location instead of online. It’s an excellent way to build your business with a physical presence, but there are some challenges to be aware of.
The benefits of storefront lending include:
- Increased visibility (you’re more likely to attract customers)
- Easier communication with applicants (you can talk on the spot and make decisions right there)
- Access to local market knowledge (it’s easier to find out whether they’re financially stable or not)
- The challenges of storefront lending include: Higher overhead costs (you have to rent space, pay for utilities and other maintenance expenses), increased competition from other lenders (it’s harder for you to stand out if you’re competing with other stores), your store can only draw borrowers from a limited radius around your location rather than statewide with online lending.
Defaults are typically lower because your customer service reps build bonds with your borrowers. They know their customers’ names, kids, pets… It’s more difficult to blow off the big, bad online lender vs. the local lender in their community.
Which loan product is right for you?
Your decision to start an online or storefront consumer loan business will depend on which type of product you want to offer customers, the state you choose to launch in, your lifestyle choices, and your exit plan.
There are many types of loans you can make, so it’s important that you understand the risks involved before starting your business.
You’ll have to consider:
- What is the purpose of your loan product(s) in addition to profitability?
- How important is it for you to help your fellow man? Earn max profits and contribute to your favorite charities? Build foundations? Keep it in your family? Stand back, do nothing, and just wish it ain’t so?
- Will you offer short-term loans that can be paid off within a week, or after a few months, or do I want my customers to pay over an extended period, like 3 years?
- Online title loans? They’re tricky but certainly doable. [Personally, I prefer collateralized loans.]
- The best of both worlds may be a “blended” consumer loan business. Offer loans within your community and online to your entire state.
- Of course, with the online lending model, you can lend in a state(s) you don’t even live in!
Choosing a name
Choosing a name that reflects your brand, your image, and your loan product is obviously very important. The location of your business, if it’s a storefront, may influence you. A name like “The Loansman” or “Loan Shop” works. Detroit Financial Services could work. [If you’re in Detroit!]
It’s important to consider how your name will reflect on your business and what image you want to project. You should also think about how the name will work in other languages, as well as how easy it is to say and spell.
[For inspiration, check out Dave.com. It’s a Mark Cuban-backed online lender with a cute, friendly vibe. “Banking for humans is its tagline.]
Select a location.
Choosing a location is the most important decision you’ll make for a storefront model. Your business will be there for many years, and it will become your home base, so choose wisely!
- Accessibility: Ensure your location is accessible to customers, employees, and other stakeholders. Customers should be able to reach out to you easily if anything goes wrong or if they want to pay off their loan early. Employees can get there without having to drive through traffic or park far away. Stakeholders may need easy access as well.
- Safety: You need a safe workplace where people are comfortable being around each other all day long (and at night). Don’t pick an alleyway or isolated area that doesn’t have any streetlights or cameras nearby–this will be hard on employees and customers alike! If possible, find a place with security guards patrolling on foot at night so that people feel secure leaving work late in the evening and borrowers are comfortable as well. After all, they’ll have cash often.
- Accessibility by major roads: This can help attract more customers.
- Your lease, wrongly constructed, can destroy you! (Refer to our chapter in our Manual for more on this.) Example? Can your competitor open in your strip mall?
Get necessary permits and licenses.
Check with city hall.
Make sure you have a business license and check with your state and federal regulators to ensure you comply. If you want to offer payday loans, get a payday loan license. You can obtain an installment loan or car title loan license if that’s what you’re interested in doing. Of course, every state is different.
Tip: Our Manual has a lengthy chapter explaining how to gather this information surreptitiously from your competitors.
Choose and set up the software to process loans.
Now that you know what it takes to start a consumer loan business, the next step is to choose and set up your loan management software to process loans.
Choosing a loan origination software [LMS] is like a marriage. You do not want to experience a software divorce! UGLY!
Your first step will be to select a loan origination software. This will allow you to onboard borrowers, underwrite loan applications, accept applications, process them, fund approved loans, and collect your money. There are several options available for this type of software.
It includes a list of the most popular LMS solutions and their features. Once you’ve selected an LMS, you’ll next set up/integrate with your supporting vendors. Typically this will be instant bank verification, subprime credit reporting agencies, payment processors, and more.
Choose and integrate with an instant bank acct. verification platform
Choosing and integrating your [LMS] with an instant bank account verification [IBV] system is a must when “lending to the masses.” It can be challenging to find a good system, but there are many options available that will work well for your company.
IBV provides the lender with an instant “look” at other borrowers’ bank account transactions. This is HUGE!
- Does your client claim they earn $3000/month? Do $3 thousand dollars get credited to their bank account each month? You will know instantly!
- Does your client have existing loan payments deducted from their bank account? You’ll know instantly!
Does your client’s bank account reflect zero funds available within days after their paycheck funds are credited to their bank account? You’ll know instantly!
Chirp alerts. As a lender, would you like to be alerted in real-time when there is a change in your client’s bank account? Reduced hours? Layoff? Another loan? a Debit? A credit? When are funds available so you can get your money?
All this and more is possible via platforms servicing our industry today!
AGAIN! ALL these solutions, strategies, tactics & more are in our 500+ page Manual: https://PaydayLoanIndustryBlog.com
Choose and select a payment processor
Now that you’ve decided on a loan product and have begun to develop the necessary technology, it’s time to determine which payment processor you’ll use. There are many different options available, so choose one that is reliable, secure, and offers great customer service.
When selecting your payment processor, look for one that offers a variety of payment options:
- Credit cards (Visa, MasterCard) This is difficult for payday loan lenders!
- Debit card networks (Visa Debit/MasterCard Debit)
- Bank account debits (ACH)
- Same-day funding
- A very new funding “magic bullet,” is the use of the crypto lightning network [Very new!]
Develop your key performance indicators
To succeed in lending to the masses, you need to know what metrics matter. You must understand the relevant metrics and how they relate to your overall business goals. Key performance indicators (KPIs) are how businesses measure their performance against their objectives.
To develop KPIs for your consumer loan business, you must first define its objectives. What do you want to accomplish? Do you want more customers? More revenue? Acceptable default rates? Improved lead conversion rates? A better reputation? Once these goals are identified, it’s easier to measure how well they’re being achieved by comparing them against specific metrics.
Once those metrics have been identified, they must be tracked regularly so that there is an accurate record of progress toward reaching those goals. This means collecting data from the moment the consumer enters into an agreement with your company until they’ve paid off their debt!
How do your numbers compare to your competition? We know!
Market your business.
Marketing is a critical part of running a successful consumer loan business. Customer acquisition is paramount to your success as a lender! You need to be able to attract, communicate, and empathize with your customers and potential customers for them to understand what you offer and how they can benefit from working with you.
Your marketing campaign should focus on the following:
- Building your brand! Getting your name out there among potential clients – social media, local newspapers, radio stations, TV channels, and events are good places to start.
- Selling yourself – make sure that you’re clearly communicating what makes you stand out from other consumer loan companies as well as why people should trust you instead of your competition.
- Building credibility – we all know that personal recommendations are powerful when making decisions about money and debt.
Start slow; grow big!
You should start your consumer loan business slowly and grow big. This is important because it’s better to have fewer loans and make a higher profit than to have more loans and less profit. You need a good business plan, a good team, a good product and location (online & offline), as well as financing and marketing strategies in place before you start offering your services. Your customers will be more likely to come back if they are treated well by you!
Conclusion
Now you’re ready to get started. You have your plan, and you know what steps to take. Don’t be afraid to start small; many businesses do just that! However, if you want your business to grow big and fast, then it’s crucial that you choose the right loan product(s) for your business model and that you secure appropriate capital.
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