Captives see share of new loans rise on subvented financing

Captive finance companies’ share of the new-vehicle loan market continues to rise, thanks to subvented loans and cash incentives from their automaker parents.

Captives financed 51.62 percent of all new-vehicle loan originations in the third quarter, up from 50.18 percent a year earlier, Experian data show. That also marked a sharp jump from 36.83 percent in the third quarter of 2011.

For new-vehicle loans and leases combined, captives’ share reached 64.5 percent during the third quarter of this year, J.D. Power data show. That’s up 11 percentage points from the third quarter of 2011.

Captive finance companies’ share of the new-vehicle market suffered a “drop-off caused by declining new sales and lender-type shifts during the recession,” Melinda Zabritski, senior director, automotive financial solutions for Experian, said in a statement.

But they came roaring back, especially in 2014. That year, captives’ new-vehicle loan share leapt 6.9 percentage points to 50.18 percent.

After the captives as a group, banks held the second-largest share of new-vehicle loans in the third quarter with 33.7 percent. Add in used-vehicle financing, though, and banks had the largest total market share at 34.7 percent of loan originations, compared with captives’ 28.68 percent, according to Experian.

Appealing choice

Subvented loans and other manufacturer-based incentives make captive financing an appealing choice for new-vehicle buyers and dealers, Zabritski said.

“Captive finance companies often provide an additional source of revenue as well as a strong pipeline to credit for their dealer networks,” she said in the statement.

And many captives are loosening standards on subvented deals, said Mike Buckingham, senior director of the automotive finance practice at J.D. Power. Some captives that were “holding the line at 60 months have moved into 72-month subvention” by offering 72-month loans with 0 percent financing, Buckingham told Automotive News.

Coupling low interest rates with cash offers is the key to securing customers, he said, but banks can’t subvent that interest.

Communications

Captives’ incentives, such as holiday offers or bonus cash and APR subvention “induce customers even further,” and financing with captives helps automakers retain customers and communicate with them regularly, he said.

Because a captive finance company communicates with consumers monthly via statements, financing with a captive creates a marketing channel for the automaker and a way to retain customers down the road, even if the loan is a long-term one.

Captives also finance about 96 percent of leases, Experian said.

Indeed, said J.D. Power’s Buckingham, leasing has been a “cornerstone” of captives’ growth. Nearly 30 percent of new-vehicle transactions are leases, Power data show.

“Leasing is a captive product, so immediately, almost 30 percent [of the new-vehicle financing market] is controlled by the captives,” Buckingham said.

Rate hike edge

Captives may have a competitive advantage against other lenders when the Federal Reserve hikes interest rates, as many observers expect, Zabritski said.

The rate hike is expected this month, and when that happens, captives have “potential to pick up more market share. Rates will be subvened. It could be a [monetary] loss” to other lenders, Zabritski told Automotive News.

All lenders’ costs of funds will rise slightly, Buckingham said. But in the next year, he doesn’t expect a rise in interest rates to hurt the market.

Bob Carter, senior vice president of Toyota’s U.S. auto operations, agrees, so long as there aren’t multiple rate increases within one year.

Even if rates do go up, that might not have a major impact on captives’ cost of funds. Carter noted that Toyota Financial Services Inc. borrows on the open capital markets, where a Fed funds rate hike has already been factored into market rates.

More gains

Buckingham predicted that regardless of any rate climb, captives’ share of new-vehicle loans will continue to go up, although just slightly.

“There’s not a whole lot of upward room there. They’re getting a robust share right now,” he said. “It’s a matter of the sales outlook. If sales go down, they may go up with more incentives in the marketplace,” as automakers try to hold onto their share of the new-vehicle market through more financing incentives offered through captives.

On the other hand, if new-vehicle sales take a dive or if the market shifts more towards used-vehicle financing as more late-model used cars and trucks come to market, that would weaken captives’ natural strength in new-vehicle loans and leases, said Zabritski.

Strong forecasts

The forecasts come amid widespread expectations of continued strong U.S. new light-vehicle sales for the next two years. The National Automobile Dealers Association forecasts 2016 sales at 17.7 million new cars and light trucks and 2017 volume at 17.2 million.

“We think there’s another good, solid 22, 24 months at this level,” said Toyota’s Carter. “The economics, the interest rates, the employment -- everything pretty much says that we should remain at this level” in 2016 and 2017.

You can reach Hannah Lutz at hlutz@crain.com

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