Advantages and Disadvantages of Using a Captive Finance Company

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Automotive Editor

Justin Cupler has specialized as an automotive writer since 2009 and has been published in multiple websites and online magazines. In addition to contributing to CarsDirect, Justin also hosts a web-series car-review show and dabbles in the world of personal-finance writing.

His specialty is in the high-performance realm, but he has a deep love and understanding for all things automotive. Before diving into the world of writing, Justin was an automotive technician and manager for six years and spent the majority of his younger life tinkering with classic muscle cars.

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, Automotive Editor - May 24, 2016

Captive finance companies live a strange business life, as their sole purpose is to offer financing for a parent company’s products. This gives the parent company the ability to increase sales without the risk of taking on the financial burden of handling loans or the struggle of fighting with outside lenders for approvals. What’s more, the parent company also profits off the interest charged by the captive finance company. With these “inside” lenders come tons of benefits, but there is also an element of risk with these types of finance companies.

Advantages of Captives

In with the Supplier: Since the captive finance company is usually owned by the parent company, it may be able to make "loans" that don't require any up-front money. Instead, the parent can simply wait for the consumer to pay it in monthly payments. Additionally, credit card companies and credit unions are required to borrow the money that they lend at the going rate, leading to potentially higher rates than the captive finance company can offer.

Easier Financing for Damaged Credit: Captive finance companies may also be able to get financing for customers who are unable to get a loan from another financial institution due to credit or income issues. Captive companies are willing to provide these challenged loans because of the decreased risk that they have in lending money for their own products.

Better Terms: Because captive finance companies are not dealing with “real” cash loans, they have little to no risk involved. So, this allows these companies to potentially offer significantly better deals for some buyers, including cash rebates, super-low interest, and more.

Disadvantages of Captive Financing

Can be too Forgiving: One of the main disadvantages to captive financing is that you could potentially be approved for a loan that you can't afford because of their willingness to dole out higher-risk loans.

Inflated Fees: If you are not careful, captives will inflate the loan in the interest of making bigger profits for the parent company. People with bad credit usually get high rates anyway, but a captive could inflate these to more than twice as much as other lenders may do.

Higher Payments: Captives tend to give shorter loan periods, making monthly payments significantly higher than many traditional lenders. A captive will do this because it’s are owned by the car company, and said parent company wants to get its profit on the books as quickly as possible.

The Devil’s in the Details: Not only do captive companies sometimes charge high rates, but some captives and their parent companies have been accused in the past of overcharging for a car, requiring an inflated interest rate to get a special price, requiring additional features for special rates, and more. Check the fine print and you should be fine, though.

In summary, captive finance companies can be an excellent way to get that new car you’ve been drooling over—but make certain to read the contract and re-read it to assure there is no tricky wording that could get you in trouble down the road.

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, Automotive Editor

Justin Cupler has specialized as an automotive writer since 2009 and has been published in multiple websites and online magazines. In addition to contributing to CarsDirect, Justin also hosts a web-series car-review show and dabbles in the world of personal-finance writing.

His specialty is in the high-performance realm, but he has a deep love and understanding for all things automotive. Before diving into the world of writing, Justin was an automotive technician and manager for six years and spent the majority of his younger life tinkering with classic muscle cars.

Follow On: Twitter

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