Captive Finance Companies Make a Comeback

Captive finance companies are taking market share from banks and credit unions this year, with the captives likely helped by a modest comeback in factory-backed incentives and in leasing, which the captives dominate, says Experian Automotive.

GM Financial is an exception to the rule on share gains. Parent company General Motors is touting its incentive “discipline,” keeping incentives essentially flat.

The publicly traded franchised dealer groups have been calling on the manufacturers and their captives to add incentives to help move an increase in inventory — especially for electric vehicles — and to help offset higher interest rates since the Federal Reserve started raising rates last year.

The complaints appear to be paying off. Captives had a 30.4% share of total third-quarter originations, up from 21.5% a year ago, according to the latest State of the Automotive Finance Market report from Experian Automotive.

In the same period, credit union share fell to 23.1% from 29.2%. “That goes hand in hand with the incentives. If the captives are not running those, most of that share goes to credit unions,” says Melinda Zabritski, head of automotive financial insights for Experian Automotive.

Meanwhile, banks’ share declined to 25.2% in the third quarter, from 27.3% a year ago, the report says. Several regional banks have cut back or even eliminated indirect auto lending via dealers in recent quarters.

According to Experian Automotive, captive finance companies had sharply lower interest rates on shorter-term loans of up to 60 months in the third quarter compared with banks and credit unions, a result that almost certainly reflects incentives for the captives, Zabritski says. 

Separately, captive finance company Ford Motor Credit reports its share of the company’s U.S. retail sales was 50% in the third quarter, up from 41% a year ago..

U.S. finance contract volume for Ford Credit, including new and used, was 210,000 units for the quarter, up 22%. Year to date, its volume is 607,000, up 25.4%.

GM Financial says its share of U.S. retail loans was 44.8% in the third quarter, down slightly from 45.3% a year ago. GM Financial says the lower share reflected changes in incentive programs. The captive reported its target is 45% to 50% of U.S. retail share.

Parent General Motors says its strategy has been to keep a tight rein on incentives, and to introduce new models that don’t need incentives as much. “Our overall incentives have gone from consistently above the industry average to consistently below,” says Mary Barra, GM chair and CEO, in a GM earnings conference call..

During  the call, GM chief financial officer Paul Jacobson cites J.D. Power data from the Power Information Network that shows in 2023, GM incentives on average are trending about half a percentage point below the industry average of 3.7%, measuring incentive spend as a percent of average transaction price.

In 2021, GM incentives were 1 percentage point above an industry average of 6%, Jacobson says. That decrease in incentives from 2021 to the present represents an average per-vehicle  savings of $1,500, he says.