Many consumers can try to get approved for a car loan through any number of sources, and one of the most widely used is a captive finance company which, for some, may not be the best option but their only option because all other possible financing sources have turned them down due to bad credit. Here are some things that consumers should consider if applying for an auto loan with bad credit through one of these types of companies.
A captive finance company is a subsidiary entity of a larger corporation that manufactures and sells a product to the general public. In the case of automobiles, a captive finance company offers loans to consumers who want to buy their parent corporation’s vehicles. Some popular and well known captives are General Motors Acceptance Corporation (GMAC), the Ford Motor Credit Company (FMCC) and Mazda American Credit. Most often, car consumers who can’t get approved for a typical bank loan will apply to one of these types of corporations in order to buy their respective company’s cars.
Consumers looking to get a loan from a captive should be careful that they are not getting into a loan that they can’t afford. When bad credit becomes obstacle in obtaining a low rate loan, the captives are often the only option and while they will offer bad credit loans, they may offer them at such high rates so as to make the most money for their parent company from a consumer who has no other place to turn. This not only inflates the worth of the car, but the consumer is being charged higher rates than a bank would offer while paying higher payments on shorter terms so as to minimize any exposure for the parent corporation.
Because the captive is a subsidiary of the corporation, the salesman on the floor may try to jack the price of the car up with additions that the consumer doesn’t want, there may be a higher APR than is usually required on the loan, or there may be special incentives that may sound enticing to the buyer but are manipulated in the fine print. These are done solely to get the amount of the loan higher so that the captive can charge the consumer more money for the loan. The captives work on commission, so therefore, the higher the loan, the higher the commission. The consumer must be savvy enough to steer through this hard sell as best as possible or otherwise they could be paying much more on this car than they intended.
Consumers who are seeking a bad credit loan don’t get very far with banks or other outside lenders. Any score below a 600 will be an automatic rejection by a bank because they have strict regulations and guidelines. Captive financing companies will usually work these consumers because the captives have a product to help sell and if they can sell it to a consumer with bad credit that is still a sale in their view, so they are willing to make exceptions more readily.