Car Loans, Banks and Captive Finance Companies

A disproportionate amount of car loans in the past decade have been made by captive finance companies.  The captive finance companies are the lending divisions of the large automobile manufacturers.  These finance companies include GMAC, Ford Motor Credit, Chrysler Financial, American Honda Finance, Hyundai Motor Finance Company and more.  The market is now changing and new car loans are being originated by direct lenders in larger quantities.

The car loan and finance industry is divided into two main components.  The first division is the indirect car loan or finance market which covers the loans that dealers handle for their customers in the showroom.  The other segment is the direct car loan market which covers the car buyers that go directly to a bank or other finance company for an auto loan as opposed to the loans that are supplied through the dealer.  The indirect market has been generally dominated by the captive finance companies.  But not all indirect lending is done by the captive finance companies.  Banks and other financial institutions also engage in indirect lending with the help of the dealerships. 

In recent years, the banks have let the car company finance divisions do the bulk of the indirect lending.  Banks and other financial institutions were satisfied with the smaller segment of direct loans.  Until our recent credit crisis, financing automobile purchases has been a very profitable component of the car industry.  Now that has changed.  Captive finance companies are no longer the profit machines they once were.  Many finance companies, including GM’s own GMAC Financial Services, have tightened credit standards because they can’t borrow money to lend, or they’re reluctant to lend and risk further defaults and losses.  The finance arms of the major car companies now have limited funding options.  The market for the car loans they bundled and resold as securities are not as liquid or as financially worthwhile.  Car loan losses have risen and used vehicle values are declining which weakens their ability to sustain additional car sales and leases.

There are now more opportunities for banks to take advantage of automotive financing while the captive finance companies lick their wounds.  This results in more opportunities for the consumer as well.  There is no advantage in using the captive finance company to provide the loan on new car purchases.  Banks, credit unions, and other finance companies are now providing competitive car loan rates and terms that offer a better deal to the new car buyer.  While the banks are moving further into car lending, it is more important than ever for the consumer to shop and compare car loan interest rate and terms.  This means, shop and compare auto loan rates before stepping into the dealership.

The used car market has always remained highly fragmented.  The captive finance companies of the manufacturers do very little business in this segment.  Direct bank lending and finance company loans have shared the market with indirect lending of the dealerships that is spread out between more banks and finance companies.  In the used car loans there are more opportunities as well for banks and consumers to take advantage of the turmoil within automotive financing.  While the captive finance companies are strained to maintain their core attention and limited resources on the new vehicle market, dealerships and consumers are looking to banks, other finance companies and credit unions to fill the gap for used car loans.

In the coming months and years, the market for new car loans and used car loans is expected to become more fragmented.  The number of consumers taking out car loans from banks and finance companies directly is rising as the captive finance companies have raised both their interest rates and rejection rates on new car loans.  The competition should help car buyers and those that are looking to obtain a car loan, but the need to shop and compare car loan rates is has become even more important in order to obtain the best car loan and the best car loan rate.

Tags: car loan rates, car loans, used car loans

This entry was posted on Sunday, February 15th, 2009 at 12:58 pm and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.