Credit unions and banks fall to captives in auto finance market share

Credit unions are losing market share in automotive financing as captive finance companies surge ahead.

Credit unions fell to just over 22 percent of total financing in the fourth quarter of 2023, down from 28 percent the same time a year ago. Meanwhile, captives' market share grew to 32 percent, up from 24 percent.

In 2022, captives withdrew incentive programs amid inventory shortages and their market share shrank. Credit unions, on the other hand, saw historic growth and took the lead in total financing; the lenders ended the year roughly six percentage points ahead of where they ended 2021. Now, inventory levels are more normal and funds are costly, said Dawit Kebede, senior economist at the Credit Union National Association.

With interest rates high, credit unions "have to respond to that changing market condition," Kebede said. "There is a liquidity constraint."

Banks' market share ended between captives and credit unions at 24 percent in the fourth quarter, down from 25 in 2022. But they had the largest share of the total loan market, followed closely by credit unions. Captives had the third highest loan market share but were up about five points from the end of 2022.

The constraints of high interest rates are being felt across lenders in the automotive finance space, Kebede said. "Even though there is demand, there could be some limit on how much that credit unions or banks can lend."

A return of captive finance incentives is likely driving the shift in market share, said Melinda Zabritski, Experian's senior director of automotive financial solutions. And with interest rates still high, captives with automaker backing are in a unique place to compete, she said.

"We are certainly seeing the captives with rates that are lower than all the other lender types as a whole," Zabritski said.

The return of incentives is primarily beneficial for customers with higher credit scores who can qualify for the programs. And the incentive rates are not so low that they can entice people who can afford to pay cash, Zabritski said. In 2023, the average cash penetration rate for internal combustion engine vehicles was more than 18 percent, Experian found.

With captive incentives, the dealer is "still going to get the financing, they are still getting the participation," Zabritski said. "I think the bigger impact on the F&I office is that increase in cash."

Captives' market share is several percentage points above where it was in 2019 at 26.2 percent of total financing. Pent up new-vehicle demand has likely elevated that market share further, Zabritski said.

"I think as we work through that pent up demand," she said, "and things become a bit more normalized, the captive share might drop a few percentage points."