Some US consumer banks are pulling out of or scaling back their lending in the subprime auto loan market.
But that won’t matter much to the biggest automakers in America, many of which have ‘captive’ finance shops. In other words, they have wholly owned finance subsidiaries who exist for the purpose of making loans to customers. Ford and Toyota are among the biggest players in this lending business.
Captive lenders are a massive financial force in the auto lending business.
Information services firm Experian, which tracks auto sector loans, published data last year showing that captive lenders were responsible for around 28% of auto loans while banks were only slightly ahead at 35%.
One Wall St. source tells Business Insider that it is likely that as consumer banks continue their exodus from car loans, the big automakers will quickly fill the demand for cheap credit void in order to get more subprime borrowers in a shiny new ride.
This is confirmed by the Experian’s data, which shows the ‘captive’ lending market share surging.
The rise of subprime auto loans
As the US job market continues its rally, automakers have been increasingly eager to capture a greater percentage of the loan market share used to purchase their new cars. To capture that marginal demand, many have increased their lending to borrowers with poor credit, or the subprime borrowers.
However, we’re seeing indications that some players want less to do with these riskier borrowers.
Wells Fargo & Co., which has been among financial services sector leaders juicing up the subprime auto lending, is pulling back on car loans. The bank is capping its subprime auto lending at 10% of its total auto loans, according to multiple reports.
That effectively means a reduction in auto loans compared to 2014 — but not for everyone.
Subprime borrowers aren’t a big worry to ‘captive’ auto lenders
The word ‘subprime’ has had a jarring impact on the psyche of some investors, after subprime home loans were largely blamed for the financial crisis in 2008.
However, the volume and value of subprime auto loans, even now, is at a small fraction of what subprime home loans represented in the years leading up to the market’s crash.
Experian’s report revealed that banks have been more cautious than ‘captive’ auto lenders, which has helped juice up automakers’ top line.
At the end of the third quarter of last year, ‘captive’ auto lenders — which includes the finance arms of General Motors, Ford and Chrysler joint venture Chrysler Financial — had increased their total auto loan market share. Even after General Motors spun out what would become Ally Financial, the automaker re-launched its own captive auto lending arm, GM Financial — and that is helping beef up the number of subprime auto loans in the market.
Compared to banks, captive auto lenders are shelling out far more loans for brand-new automobiles (which helps boost their automakers’ top lines) than banks, which have scaled back lending for new vehicles.
Captive auto lenders are dominating new car sales, not used car loans
Now — as the aggregate value of auto loans hit a peak just two weeks ago — the captive auto lenders appear eager to capture an even bigger share of the auto loan market. It isn’t just General Motors, this also includes international automakers’ lending shops, and the Ford Motor Credit Company, among others.
While banks’ exit from the auto lending game might mean less options for subprime borrowers looking for a used car, it isn’t necessarily bad news for buyers looking for a new automobile. Or, the car companies, themselves.
The game of auto loan musical chairs will continue, likely unabated, until the Federal Reserve President Janet Yellen signals an interest rate hike. At that point, the question may be: have the automakers set themselves up for another hit in a financial crisis?