The new bank will focus on providing straightforward and competitive savings and loans for UK consumers.
Paragon Bank will operate in specialist lending markets. Its initial product range will be car finance loans available via brokers and car dealers.
John Heron, managing director of Paragon Mortgages, said: “This is a significant strategic step for the Group.
“Paragon Bank provides further expansion and diversification of our funding capability which in turn will facilitate the diversification of our lending.
“This will see the group returning to sectors where it has previously been a major competitor – car finance and personal loans – and will provide a spring-board for greater innovation going forward.”
Personal loans will be available through brokers later in the year.