As interest rates rise, could captives lose their foothold in the auto finance market?
The Federal Reserve has raised its benchmark interest rate five times in the past 18 months, twice this year alone. Two more rate increases have yet to come this year, and another three are expected in 2019. These increases could hinder captive lenders' ability to originate subvented loans, and those lenders could lose customers in the process.
"Raising rates certainly impacts the cost of funds for the captives, but lots of that could be offset by the manufacturer," says Melinda Zabritski, Experian's senior director of automotive financial solutions.
But automakers aren't exempt from the pain of costly financing. The Fed rates already have automakers scaling back on 0 percent financing -- a summertime strategy used to cycle out old product from dealerships before autumnal vehicle launches.
The increasing threat of tariffs -- and the current tariffs on steel and aluminum -- are also making it tougher for manufacturers to shoulder the cost of financing incentives for their customers. Offering one-time, short-term incentives such as employee pricing or cash rebates could become more equitable methods for automakers and captives to present customers with attractive deals.
Captives and credit unions were the only lender types to increase auto finance origination market share in the second quarter. Credit unions' share continued to grow the most, rising 12.9 percent to make up 21.3 percent of the market in the second quarter. Captives' share of the new- and used- vehicle loan origination market was 29 percent in the second quarter, inching up 1.2 percent from the year earlier, according to Experian.
Captives don't necessarily operate as profit centers. Their primary mission is to help sell cars, Zabritski says, and their appeal to car buyers heavily relies on what the manufacturer can offer.
But if affordability remains the goal, captives and automakers should work hand in hand to offer incentives that attract the customer while still protecting profitability.