Otto, a fintech startup which aims to allow people to tap into their vehicle’s equity for access to credit, has raised $4.5 million in a seed round of funding.
The Dallas-based company is building a mobile platform that will essentially let people borrow against their vehicles at the same interest rate as standard credit cards. But unlike other cards, Otto will not charge fees or overdraft charges, and will not require applicants to supply their FICO credit scores. Users will be able remotely verify and collateralize their cars through Otto’s mobile platform, which is set to launch in early 2022.
Uncommon Capital led the startup’s seed financing, which included participation from Pelion Venture Partners, 1930 Capital, Bloom VP and Spacecadet Ventures. Other investors include Mark Cuban, entrepreneur and Shark Tank investor; Leo Polovets, co-founder and general partner at Susa Ventures; Bill Clerico, co-founder and CEO of WePay; and Vivek Garipalli, co-founder and CEO of Clover Health.
Friends and former colleagues George Utkov, Jordan Miller and Daniel Ashy came up with the idea for the company after Utkov’s friend became the victim of a “predatory” title loan agreement.
“Millions of people every year take out what are called title loans — and it’s when you own your car outright, and basically go pledge the title of your car as collateral against the loan,” said Miller. “These loans are 30 days long. They are 500%+ APR, and they absolutely crush people.”
Utkov’s friend, who had lost a job during COVID, got a title loan against a truck that was worth between $15,000 and $20,000. When he couldn’t pay it back, he lost his car.
“That exposed us to this whole world of lending products for the underserved, for the non-banked,” Miller said.
The trio began work on Otto at the onset of the COVID-19 pandemic. After Utkov’s friend’s experience, they realized that people, for example, with unstable incomes or that are recent immigrants are extremely limited in options when needing money. As such they often have to resort to payday and title lenders, pawn shops or other non-bank credit lenders who often charge “exorbitant” fees.
With Otto, the friends/founders want to give people another option and one that won’t make their financial situation worse, but instead, better. The interest rate it charges will vary, but the upper limit is 24%, the company said.
Otto chose the asset class since vehicles are often the most common and biggest asset owned by so many who are struggling financially and are underbanked.
Through the company’s mobile app, users will be able to apply and get pre-approved “within minutes” for standard interest credit cards, which are about 96% cheaper than the loans typically available to this user. The user is then guided through a step-by-step process of remotely validating their information with hardware provided by the company, and activating their new Otto credit card.
Consumers can use their credit cards to help pay for in-store and online purchases, build credit and earn rewards. Part of the goal is to help users build their credit so they can gain access to even more affordable credit products. When consumers use Otto, their repayment history will be reported to all three major credit bureaus.
Like all major credit card issuers, Otto will make money in two ways — via interchange fees and interest.
“We want to provide financial mobility to those that need it most, regardless of their credit history, and help them move forward in their lives by giving them credit options that they may not otherwise be able to access,” Utkov said.
Besides helping people build credit, the Otto team also will track a user’s financial health and tell them things like what they’re spending their money on, and to be prepared for certain expenses based on their previous charging history.
“Really what we’re creating is a system that is 95% cheaper than the lending products that these people use every day,” Miller said. “We feel like as we build this, and launch it, we have the power to fundamentally change millions of people’s lives.”
So, what happens if a user misses a payment? Otto says it has a comprehensive program that helps users get back on track in the event of missed payments. It also says that its minimum monthly payments are the same as standard credit cards, or about 2-3% of an outstanding balance.
“Repayment plans are tailored to meet the user’s unique needs,” the company said. And, users can trade-in their vehicle through the platform for a different car of lesser value
Execs added: “Otto will not repossess a vehicle unless all other options (such as repayment plan, vehicle trade-in, etc.) are exhausted.”
Part of their plan to get their word out is tap into the resources of their investors. For example, Mark Cuban is already helping Otto forge local partnerships with businesses doing adjacent services such as advancing financial literacy and credit repair that are already doing outreach in communities, Utkov noted.
“We believe that building trust from the ground up is very important, and that there’s a benefit to building on the community level,” Miller said.
Via email, Cuban said he invested in Otto simply because he liked “the idea of helping people use the equity in their cars.”
“I think Otto has a strong commitment to helping those who are underbanked and need financial support rather than extracting every dollar they can,” he added.
Tikhon Bernstam, managing partner at lead investor Uncommon Capital, said his firm was inspired by Otto’s vision of offering a new type of asset-backed loan for the underbanked.
“If you’re unbanked or underbanked you currently don’t have access to credit at the price that Otto is going to provide it at,” Bernstam wrote via email. “Your alternatives are traditional payday loans at predatory interest rates or traditional title loans at predatory interest rates. Otto is changing that.”
The story was updated post-publication with additional information from the company