US carmakers expand in-house finance to challenge banks
Automakers' captive finance arms now account for half of new car loans in the US, as manufacturers target direct lending and leasing to boost sales and customer retention.
US automakers have sharply increased their share of the car financing market, with captive finance divisions now providing half of all new car loans in the country. Experian data for the first quarter of 2014 shows a notable jump from the previous year, when manufacturer-linked lenders held a 37% share. This marks a significant shift in how vehicles are financed in the US, with car manufacturers now challenging banks in a segment that was once dominated by traditional financial institutions.
Automakers Expand Their Role in Car Financing
The move by automakers to strengthen their financing divisions is rooted in the booming North American car market and the companies' improved financial health. By establishing and expanding in-house finance arms, carmakers have been able to offer a wider range of products, including loans and leases, that directly support their dealer networks and sales strategies. This vertical integration allows manufacturers to manage incentives, tailor offers to specific models or inventory, and provide more flexible terms to customers.
Market Share Growth: Automaker Finance vs. Banks
| Year | Automaker Finance Share (New Loans) | Leasing Share of New Car Sales |
|---|---|---|
| 2012 | N/A | 20% |
| 2013 | 37% | 23% |
| 2014 (Q1) | 50% | 26% |
Automaker finance arms have become the dominant force in leasing, accounting for almost all lease contracts in the US market. Leasing itself has grown in popularity, making up 26% of new car sales in early 2014, compared to 20% in 2012 and 23% in 2013. The trend reflects both the manufacturers' willingness to subsidise attractive deals and consumers' appetite for lower upfront costs and regular vehicle upgrades.
By offering in-house loans and leases, carmakers can provide lower monthly payments and longer terms than many banks. This makes new vehicles more accessible and attractive to buyers, especially as car prices have risen in recent years. The approach also helps manufacturers support dealer networks and manage incentives more directly, ensuring that sales targets are met and inventory is moved efficiently.
How Banks Are Responding
- US Bancorp has shifted focus to used car financing and lending to customers with weaker credit profiles.
- Wells Fargo has partnered with automakers to gain access to large dealer networks.
- Banks are seeking new niches in response to automaker dominance in new car loans.
Banks, facing stiff competition on new car loans, are shifting their focus. Some, like US Bancorp, are moving into used car financing or targeting customers with weaker credit profiles. This change allows banks to serve segments less dominated by automaker finance arms, but it also exposes them to higher risk and potentially lower profit margins. Others, such as Wells Fargo, have opted to partner with automakers to gain access to large dealer networks, rather than compete directly on prime new car lending.
These partnerships can provide banks with a steady flow of customers and help them remain relevant in the auto finance market. This shift in focus is partly a defensive move, as banks try to maintain their presence in auto lending. However, it also signals a recognition that the landscape of car financing is changing, with manufacturers now playing a much more active and influential role.
Implications for Buyers and Dealers
- Buyers gain access to tailored offers, including discounted rates and special lease terms, often only available through automaker finance.
- Financing approvals can be faster and more streamlined for dealers, reducing reliance on third-party banks.
- Manufacturers gain more control over the sales process and customer experience.
For buyers, the rise of automaker-backed finance means more tailored offers, with incentives often linked directly to inventory and sales targets. These offers can include discounted interest rates, special lease terms, or cash-back incentives that are only available through the manufacturer's own finance arm. As a result, buyers may find it easier to qualify for financing or to secure a deal that fits their budget, especially when purchasing a new vehicle.
Dealers benefit from streamlined approvals and the ability to close deals on the spot, reducing reliance on third-party banks. The arrangement also gives manufacturers more control over the entire sales process, from showroom to end-of-lease returns. This can improve customer satisfaction, as the process becomes faster and more transparent, and it allows dealers to focus on selling cars rather than managing complex financing arrangements with multiple lenders.
Changing Competitive Landscape
The expansion of captive finance is changing the competitive landscape for US banks, which must now adapt to a market where manufacturers are not just building cars but also financing them. Banks that once dominated the new car loan market are being pushed to find new ways to compete, whether by targeting used car buyers, working with subprime customers, or forming strategic alliances with automakers and dealers.
