Carmakers make business harder for banks in the new car maket

Article by Andrew Christian, on June 20, 2014

Financing arms of carmakers like Toyota Motor Corp, Honda Motor Co and Ford Motor Co, accounted for around half of all new car loans in the United States in the first quarter, compared to 37 percent in the year ago period, according to credit data firm Experian. The financing units also write majority of leases, contributing to a record 26 percent of new car sales in the period this year, up from 23 percent in 2013.

They are also providing subsidies from carmakers, reducing monthly payments and extending loan terms that allows car buyers to have an easier time purchasing their new vehicles. Their presence has become a threat to major banks, who have been forced to increase their business into riskier parts of the market just to make loans.

For instance, US Bancorp has now ventured into used car financing, where carmakers’ finance units are usually not willing to go into. US Bancorp has also commenced offering loans to less creditworthy borrowers.

On the other hand, Wells Fargo & Co has been leveraging off a nationwide agreement with General Motors to provide loans subsidized by carmaker as part of its efforts to gain more of the used car loan business at GM dealerships.

Industry analysts and consultants are now starting to throw question on the sustainability of the efforts of carmakers with financing arms. For instance, if interest rates surge, carmakers could find the incentives too costly unless they are ready to compromise some of their profits.

Also, pulling back from deals could hurt demand. On the other hand, if used car prices weaken, the carmakers’ financing units could suffer losses vehicles coming back from leases and re-possessions. [source: BusinessInsider]

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