The Ins and Outs of the Car Finance Industry, with Robert Swisher, Brant Cooper and Sonia Steinway

By Published On: June 26, 2019Categories: Blog, Podcasts, The CTO Studio

The second biggest purchase most of us will make is a car. Many people finance that purchase through the dealer, which means knowing the ins and outs of the car finance industry is important. Joining us to share her insider knowledge is Sonia Steinway of Outside Financial, of which she is the co-founder and president. 

On this episode with her, we go deep into car dealerships and the process of car buying, and how to know what you are signing when you agree to a car loan. Listen in for those topics and more on today’s CTO Studio.

In this episode, you’ll hear:

  • Where do car dealerships make most of their money? (1:55)
  • What are the two primary ways to pay for a car, and which is better? (7:30)
  • Are customers more agile than businesses today? (18:55)
  • What lessons they learned from TrueCar. (32:10)
  • How has being an attorney helped her to be an entrepreneur? (42:30)
  • And so much more!

Sonia tells us about Outside Financial, the company she founded. Outside Financial helps car buyers and car owners understand their financing options and connect to the right lender.

Most people hate car buying because it is a slow and painful process, and people often feel they are taken advantage of in the financing process. And the truth is they are: the dealer’s back office actually makes more money on selling you the financing of a car than they do selling you the car itself.

Outside Financial wants to help people understand what they are committing to financially, and to give them the right tools to make the right decisions and connect them to a lender outside of the car dealer. 

How did she get the idea to start this company? Sonia shares her back story: she is an attorney, with a background in consumer finance and financial regulation. In the fall of 2016, she was deciding whether to work for a regulator, or do something that would tap into her passion of helping people with their finances. 

It didn’t seem like the right time to go work for a regulating agency, and she saw a lot of players in the fintech market change the game for people’s finances. At the same time, she and her co-founder saw a trend where sites like TrueCar and others offered price transparency: they were telling you what you should pay for a car. 

As a result, dealers were making much less on the front end and were making up for it on the back end: dealership financing. There is absolutely no legal requirements for disclosures in the car financing market (like there is in mortgage market because of Dodd-Frank regulations).

With a mortgage, you have to prove you can repay the loan because of Dodd-Frank. No such laws exist in auto finance. Because of her desire to help people with their finances and the lack of regulation in this market, she and her co-founder saw an opportunity to help people with this critical purchase.

We also talk about their revenue model. Outside Financial is paid by their lender partners per funded loan.  For the lender partners Outside Financial is a marketing channel because they don’t necessarily have a way to reach car buying customers. 

And Outside Financial gives lenders customers who are more educated, less likely to default, and filtered for their lending criteria. Outside Financial has a sophisticated back end decision engine that is doing the matching between the customer, their credit profile, the vehicle they are buying and the lender’s credit criteria.

If you have great credit rates don’t vary very much. But if you have less than stellar credit rates can vary significantly – from 8% to 18%! And that variance in the interest rate is based on how the lender’s credit criteria works: how much value the put on certain things. There’s a lot of power in that knowledge, especially for people with below average credit.

Also on today’s CTO Studio, we talk about subvented or subsidized financing. This happens when a car maker – let’s say Toyota – wants to sell more cars. Toyota Financial Services will basically subsidize the rate and you see 0% financing offers. If you have excellent credit this is the way Toyota incentives you to buy from them. 

In a situation like that, Outside Financial wouldn’t be able to match that rate. But they would help the buyer know how to approach the car buying process and give them the tools to succeed. For example, they help their customers know if they should purchase GAP coverage and at what price. GAP coverage covers the gap between what your insurance will pay you and what you owe on your car in the event that your car is totaled before you have repaid your loan.

Our other topics include Carvana, the structure and make-up of Outside Financial, and how much most people save by using their services versus dealership financing. Tune in and join us to hear all of that and much more on today’s CTO Studio.

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