Captives Dominating Auto Financing As Banks Resort To Risky Loans

Derek Kreindler
by Derek Kreindler

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.

Derek Kreindler
Derek Kreindler

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  • Old Man Pants Old Man Pants on Jun 19, 2014

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

  • Xeranar Xeranar on Jun 19, 2014

    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.

    • See 5 previous
    • CapVandal CapVandal on Jun 20, 2014

      @Xeranar 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.

  • Billfrombuckhead Billfrombuckhead on Jun 19, 2014

    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.

    • Old Man Pants Old Man Pants on Jun 19, 2014

      Then let's each of us pay for a deadbeat's swell new car! You first.

  • Ruggles Ruggles on Jun 21, 2014

    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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