By on June 19, 2014


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.

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17 Comments on “Captives Dominating Auto Financing As Banks Resort To Risky Loans...”

  • avatar

    Looks like the auto loan industry will be the next sub-prime fiasco.

    The memory of a goldfish.

  • avatar

    I’m curious of the number of sub-prime loans that actually get paid off completely. They’re billed as “help repair your credit!” but I know (from personal experience) if that’s what you want to do you’re better off getting a secured credit card and paying it off every month and paying the rest of your bills on time. High interest car loans are a huge drain if money is an issue (and if you have bad credit, it probably is).

    • 0 avatar

      A short primer on auto finance: All loans not 720 beacon and higher are NOT sub prime loans. There are higher yields to be made in non prime loans. Non prime is NOT sub prime. While credit risk increases with a non prime loan, this is managed via shorter term, higher interest rate, higher down payment requirement, and other measures. There are higher “default” rates on non prime auto loans. But it isn’t the “default” that is a problem. “Deficiency” is the problem. If that can be managed via a fund set up from the higher interest charged AND through the higher down payment requirement, banks have no additional “risk.” If auto finance were limited to only prime credit borrowers, only 20% of the market could gain financing.

  • avatar

    Hard assets seem to be high ticket items, while we make our standard of living seem like it’s going up with cheap electronics. Less and less folks can work on their own cars, not because they are more challenging (OBDII makes it easy), but because they don’t know how, don’t own basic tools, or aren’t allowed to open their hood in their driveway. Loans inflate demand, which increase prices beyond utilitarian value several times over. Nearly everyone needs a car based on their standard of living, so loans will continue, and they are still a better investment for the consumer than our internet/tv/cell phone plans!

  • avatar

    How do you turn down 0.9% like Honda offers when your CU wants 2.49%?

  • avatar

    The whole sub-prime market is exploitative and designed to catch people in the crunch, the actual economics backing up the theory that substantially higher percentages off-set the risks are false. The long term evidence actually suggests that the entire basis of the sub-prime market is a case of usury law being unenforced while the greater economy leaves more and more people behind.

    But I’m sure some people will be spinning this out in their minds as a crime of personal failings rather than the macroeconomic theory that demolishes the premises.

    • 0 avatar
      sunridge place

      Too broad of a brushstroke to say the ‘whole’ sub-prime market is exploiting those borrowers. There is a lot of action happening with high 500 to mid 600 FICO score borrowers with decent household incomes and ratios where interest rates are in the high single digits or low teens.

      It is not all Buy Here Pay Here 24.9% interest rates. And, none of the BHPH stuff is for new cars where Derek seems to always hint the real risk is present.

      • 0 avatar

        The premise of the theory that people who are ‘credit risks’ should pay Prime + 7 or higher is not a sound theory. It never was, the point with the model was that you figure with enough continuous flow and the interest rate being so high you’ll recoup enough money to offset the increased defaults. You’re right the entire sub-prime market isn’t usury, just most of it. Enough of it as the research shows that as the interest rates climber higher than prime the number of defaults increase at an increased rate, it’s far from a linear increase and it creates these unrealistic bubbles that attract investors so that when they burst the actual authorized actors aren’t caught in it but individuals are.

        • 0 avatar

          Good news. Borrowers are going to get a fair deal.

          If this type of loan is ‘lucrative’ — then, with reasonably efficient markets, prices should go down. Which they are. Lowering interest rates or loosening underwriting standards both lower prices.

          It is great to see credit markets normalizing. Lower prices on loans are good for the economy. Good for fuel economy. Good for auto safety. Time to freshen up the national fleet.

          Hope to see more of these headlines in the future.

      • 0 avatar

        How much of it is people who have fallen on hard times and are re-building their credit? I have heard that certain brands do have a significant share of these types of customers. They may have declared bankruptcy due to divorce or a business failing, but they are otherwise good people to lend to.

        • 0 avatar

          I think people misunderstand me here, I’m not advocating for them not to be lent to, I’m advocating for them to be lent to a fair rate, much closer to prime. I refuse to get into the moral and anecdotal arguments of WHY people get bad credit ratings because the ratings themselves are subjective and are based on assumptive ideas that are at best suggestive of a person’s probability of paying a loan off.

          The problem I see at a macro level is that institutional lenders are happy to throw huge subprime rates out there into the market because they’re not carrying it on their books or they’re carrying only the best trenches of the loans. If the big lenders are offering great sub-10% loans to subprime people I’m giddy, I just don’t want to see another bubble collapse.

          • 0 avatar
            sunridge place

            I’m not saying it is perfect but there is a lot of action right around 10-12%. Much better than it was from 2009 to 2011. Back then, those people practically had to go BHPH to get a car if they needed (not wanted) one.

            The current subprime market is very healthy and good for most levels of the industry. Some will pull small variations within the stats or point to a dramatic instance of a bad loan and try to predict doom.

  • avatar

    It’s better for society (all of us in general) that people with credit issues are driving safer, more economical. less polluting and more reliable cars than BHPH sleds. After being in the BHPH industry for a decade, I’m glad to see the customers getting a better deal on better cars. BHPH is an ugly business model regardless of libertarian romantics dreams of raping the undeserving.

  • avatar

    It would be nice if this article actually mentioned the credit score range they refer to as sub prime. There is not a commonly agreed on range as a matter of definition.

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