The birth of a captive finance company

Auto retailing and finance are so closely associated, it's hard to imagine that wasn't the case before General Motors and John Raskob launched General Motors Acceptance Corp. in 1919.

GMAC became the model for the modern captive finance company and helped popularize the idea of mass-market consumer financing. It also provided wholesale financing for GM dealers, a move critical to their success.

Today, about 85 percent of new-vehicle customers get financing at dealerships from captives, banks and independent finance companies, according to the National Automobile Dealers Association. And many consumers who don't get a loan at a dealership get financing elsewhere, especially from credit unions.

But before World War I, financing consumer purchases was a novel idea, except for mortgages.

Buying "on time" was limited to a few durable goods, such as furniture, sewing machines and pianos, according to the 1964 edition of My Years with General Motors, a memoir by Alfred Sloan.

Sloan, who became a key GM player in 1920, was the automaker's president from 1923 to 1937 and chairman from 1937 to 1956.

Bankers back in the day regarded automobiles as luxury purchases, and lenders saw individual consumers as risky unknowns, unless those consumers were millionaires.

"The bankers ... thought of the automobile as a sport and a pleasure, and not as the greatest revolution in transportation since the railway," Sloan wrote. "They believed that the extension of consumer credit to the average man was too great a risk. Furthermore, they had a moral objection to financing a luxury, believing apparently that whatever fostered consumption must discourage thrift. Consequently, automobiles were sold to consumers mainly for cash."

That mindset changed after the launch of GMAC.

Raskob, then chairman of GM's finance committee, designed the captive, but Sloan was on board with the project. "From where I was then on the Executive Committee, I supported the idea," he wrote in his memoir.

Raskob came to GM from chemical company DuPont, which became GM's biggest investor in 1917, largely on Raskob's advice.

But he had prior experience with consumer finance, according to a 2013 biography, Everybody Ought to Be Rich: The Life and Times of John J. Raskob, Capitalist, by David Farber.

In 1906, he had invested in a company that provided capital for book publishers that sold to the public on the installment plan. He also likely was aware that individual groups of auto dealers in Chicago and on the West Coast had experimented with lining up easy-payments financing for consumers, according to Farber.

"But these dealer-supplied credit plans were severely limited by the dealers' own credit problems," Farber wrote. "Installment sales carried risks but the rewards, Raskob believed, could be well worth it."

GMAC was the test of that logic. The first branch, capitalized at $2.5 million, opened in New York City in 1919, according to the General Motors Heritage Center. Later that year, branches opened in Detroit, Chicago, San Francisco and Toronto. In 1920, the captive went overseas with the launch of a branch in Great Britain. GMAC would go on to sign 4 million retail contracts by 1928. Largely because of GMAC, three of four cars on U.S. roads by 1926 were bought through financing rather than hard cash, according to the 2006 book Billy, Alfred, and General Motors by William Pelfrey. "That year, only thirteen of the more than 130,000 banks in the country had more money available to lend than GMAC," Pelfrey wrote.

Raskob's gamble on a captive finance arm and mass-scale installment sales paid off. Notably, it would be decades before Ford Motor Co. united a group of separate financing schemes and incorporated its own, unified captive finance company analogous to GMAC.

Ford launched its first weekly purchase plan in the U.S. in 1923, but it didn't launch Ford Motor Credit Co. until 1959, 40 years after the first GMAC branch opened. Instead, Ford facilitated loans through financing arrangements with lenders, especially Universal CIT. But Universal CIT wasn't obligated to buy dealership-arranged finance contracts, which handicapped dealers, according to John Noone, who retired as president of Ford Credit in 2012. "There was a time when Ford dealers did not have the same advantage as GM dealers," Noone told Automotive News in 2011.

While GMAC was the pioneering captive, Ford Credit is the remaining one.

GM sold a majority stake in GMAC in 2006 and further reduced its stake in 2009, as part of its government bailout and bankruptcy restructuring.

In the interim, GMAC became a bank holding company, which was later renamed Ally Financial.

In 2010, GM bought subprime lender AmeriCredit Corp. in Fort Worth, Texas, and turned it into its current captive finance company, GM Financial.

GM sold its remaining ownership in the Detroit-based Ally in December 2013. That same month, Ally became a financial services holding company, which allowed it to stay in the business of insurance and F&I products such as extended-service contracts.

Raskob left GM in 1928, after Sloan expressed concern that Raskob's public allegiance to Democratic Party presidential candidate Alfred Smith would imply GM's support, possibly sparking political backlash and alienating vehicle buyers, according to an account from the Manuscripts and Archives Department at the Hagley Museum and Library in Wilmington, Del., which has a collection of Raskob's papers.

Raskob likely is best known as the driving force behind the construction of the Empire State Building in the early 1930s. He died in 1950 at age 71. Sloan died in 1966 at age 90.