• Captive Finance Company: Pros and Cons

    For those looking at various auto loan options, it’s good to know about what a captive finance company is and what it does. A captive finance company is a separate company, usually owned by an auto maker, that takes care of financing loans for customers of that manufacturer. A lot of car loans made at dealerships can be traced back to captive finance companies, but in many cases, the buyer can choose to avoid the dealership and go directly to the captive finance company for financing a vehicle. Here are some of the potential benefits and disadvantages of that strategy.


    • Established Lenders – Captive finance companies are generally among the most solid car loan options. A captive finance company is not likely to run out of money, pull dodgy maneuvers that would compromise their reputation or get into some of the situations that smaller lenders may be vulnerable to.
    • Connected to the Auto Maker – Generally speaking, there is no lender who knows about the products of a car maker better than its captive finance company. The captive finance company shares a unique relationship with a manufacturer that can sometimes be helpful in getting specific financing deals for the cars and trucks that the company produces.
    • Everybody Gets the Same Deals – When going directly to a captive finance company, car shoppers know they are getting the standard deal that other customers generally get according to their credit risk. Captive finance companies are likely to have a very basic standard set of interest rates, and issue a large amount of auto financing loans from a kind of boilerplate agreement.


    • Broad-Spectrum Loans – A captive finance company hands out auto loans “from a distance.” Where those financing through a dealership can sit down and talk directly to dealer representatives, it’s tougher to do this with a captive finance company. Customers who find this process alien may prefer to sit down at the dealership and hash out financing as a regular part of the overall purchase.
    • Less Flexibility – Since the captive finance company tends to be very established, they are not likely to deviate from policy in order to satisfy a particular customer. Buyers who know small dealerships or other venues where they can get various forms of credit risk relief, or specialized personal auto loan deals, will generally stay away from financing through an outside company such as a captive finance company.
    • Loan Default Accommodation – Another potential downside of going through a captive finance company is in the way that lenders generally pursue collection when a buyer defaults on the loan. Because the company may be used to giving out auto loans and dealing with the consequences of nonpayment, a captive finance company may be set up for more aggressive repossessions and charge-offs than a smaller local lender. Simply because of the economy of scale, a captive finance company might not be willing to negotiate the way smaller lenders might. On the other hand, in some cases, the experience of a captive finance company can be an asset in a loan default situation.

    The above are all things to keep in mind about financing through a captive finance company, which is generally a lot different than dealing with a small local lender. Car shoppers should evaluate the pros and cons of both types of financing, and choose the one that they feel is likely to pay off for them.