What is a captive auto lending company? In short, a “captive” company is a subsidiary of a larger corporation. In the auto loan world, most major car manufacturers have these subsidiaries. The captive company structure allows them to make money not just on their products but on the financing of them as well. This arrangement gives automakers the ability to offer interest rates that are often below those extended by other traditional lenders but, as with any financial contract, it’s wise for any consumer to weigh their options.
Captive Auto Lending - The Good and the Bad
The car buying experience as a whole can be tedious and stressful. Not only is picking the car itself energy and time consuming, deciding on the best option for financing it adds another layer of frustration. Captive auto lending combines these two activities into a “one-stop shop,” but sometimes a short-term convenience gain by the consumer turns into a long-term financial gain for the lender.
Here are a few of the benefits of financing a car through captive auto lender:
- You save the hassle of shopping for a loan. You will likely receive a standard car loan based on your credit risk.
- You can often get a better rate than is possible with other lenders. This is because a car company assumes less risk because they are lending money on their own products.
- You can save time. Unlike working with a bank or other lender, you get the convenience of picking out the car and getting paid for in one sitting.
Here are a few of the drawbacks when you go to the captive lender route:
- There is little to no face-to-face interaction. With other lenders, you have the opportunity to build a relationship with a representative. With a captive lender, you will work with the company from a distance.
- There is little opportunity for negotiation. The captive lender process is usually a cut and dried, take it or leave it proposition.
- You may wind up with more car thing you need or can afford. Because the captive lender has more flexibility to manipulate the terms and rate of the loan, consumers can find themselves in a loan that their budget can’t support over time.
- You may be taken advantage of by a less-than-ethical salesperson. Captive finance companies often extend commissions to salespeople when they tack on certain extras and upgrades. Do you really need undercoating, rust protection and VIN etching?
- The attractive rate that is offered may not be the best deal over time. Depending on how it is structured, 0% financing isn’t always as good for the consumer as it sounds.
When it’s all said and done, you are the one paying for your new vehicle. After the trial of deciding on the car itself, it can be tempting to move immediately to the finance manager’s office and get the deal done. While there may be a good deal waiting behind his door, is not necessarily the best deal for you. Do your homework before starting the dance. That way you can feel good about driving your new car and about paying for it, too.