OEM captive financing arms are increasing their share of new car loans, with banks resorting to underwriting riskier loans in the used car market and to less credit-worthy buyers.
Citing data from credit agency Experian, Reuters reports that the captive arms of Ford, Honda and Toyota made up half of all new car loans in Q1 of 2014, up from 37 percent in the prior year. Buoyed by low interest rates, which allow for greater incentives, captive financing arms can offer better rates and other subsidies to consumers, enabling them to get in a new car more easily, while generating stronger sales numbers for the OEM.
At the same time, low interest rates have also created an environment where fixed income yields are low, causing investors to turn towards securities backed by auto loans, which can provide greater yields than other fixed income investments. This in turn is said to be fueling the supply of available credit for auto loans.
According to the article, certain banks (Ally and US Bancorp were among the examples cited) have turned towards financing used cars and buyers with subprime credit scores as a way of competing in the lucrative auto financing market. US Bancorp now makes 15 percent of its auto loans to buyers with subprime scores, compared to zero in previous years. Although it only represents one data point regarding financial institutions, the Reuters piece also claims that captives are increasing their share of subprime loans, while offering increasingly longer loan terms – in line with previous reports regarding declining underwriting standards and lengthier loans.