Captive Lender: Should you use one?

Captive Lender: Should you use one?

3 June 2020 Concept Car

Captive lenders are one of the finance industry’s biggest success stories. Ever since General Motors set up the car sector’s first in-house financing company, captives have gradually increased their share of the market. Today, they have eclipsed traditional banks and credit unions and become the defacto market leader.

It is easy to see why so many consumers opt for working with a captive. One of their main benefits has been to keep costs down and to make it easier for those with bad credit to get car finance.

And yet, there are good reasons to be careful. Are captives encouraging consumers to buy more car than they can afford?

Overview/Summary [If you don’t want to read the entire article]

A captive lender is the house bank of a car manufacturer. It is a separate company responsible exclusively for financing models from that particular brand.

General Motors founded the first captive lender in 1919. It was an instant success and transformed the industry. Since then, most of the other manufacturers have followed suite with their own captives.

Why they’re useful

Captive lenders have been a major growth sector for car makers. They have raised profits and made it easier even for those with bad credit to buy a new rather than a used car.

They have also been very useful for consumers:

  • Captive lenders work with predictable rules.
  • They are more open to bad credit car finance than banks.
  • They can offer better prices than many regular banks.

On the downside, some have argued that their repossession policies may be more aggressive. This is not something we can confirm first-hand, however.

Potential risks

If you have bad credit, the real issue of working with captive lenders is that they can encourage over-lending. Obviously, they will not just extend credit to anybody. And just like other banks, they will take your credit score into consideration.

Still, captive lenders can be a little more lenient. They also have an interest in encouraging you to buy new or opt for a certified pre-owned model. Both are more expensive than many of the second hand deals you can get elsewhere.

Also, keep in mind that there is never a free meal. One way captives will keep costs down is to reduce the loan term. In other words, you will need to pay the loan off faster. In itself, that is a perfectly legitimate approach. But it does mean that your monthly contributions are higher than with many dealers.


This is why, all things considered, we don’t recommend working with a captive lender. Instead, look for the cheapest car you can get, try to make down payment if you can and keep monthly rates to what you can honestly afford.

We can help you with that. Concept Car Credit is Manchester’s leading car finance provider for those with bad credit. Get in touch with us now for a concrete offer.

You can reach us at 0800 093 3385  or by sending us a message.


Conclusion - Concept Car Credit
The car market has certainly been doing pretty well. If we forget about the disastrous consequences of the Corona pandemic and the occasional cyclical downturn, automobile sales have weathered most financial crises with remarkable ease. At the end of the day, it seems, after we’ve satisfied our most basic needs like food and drink, we all need to drive.

Captive lenders have possibly benefited most from this continuous growth spurt. As more and more new cars are financed through them, their percentage of the car finance market has expanded. Today, 28% of all all car deals are backed by a captive lender. This is only four percent behind banks and well ahead of credit unions.

When it comes to new loans, meanwhile, captive lenders are by far the biggest force, commanding an impressive 53% of the market.

Clearly, these institutions have something that makes them irresistible to consumers. But what, exactly, is that? And: Should you consider working with a captive lender, too?

Table of Contents


But first things first: What is a captive lender? The term gets thrown around a lot. But in all honesty, we doubt it is clear to everyone what it means.

Simply put, a captive lender is the house bank of a car maker. It will only finance deals for models from this particular brand: Either brand new ones or, through the make’s certification program, refurbished used ones.

Although these lenders tend to carry the original producer’s name – such as the Mercedes Bank or the BMW Bank – they are actually spin-offs. As autos.com puts it:

“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.”

How do captive lenders work?

Applying for a loan with a captive lender works pretty much exactly like applying with a bank. These are, by all means, trustworthy firms with reputable business practises. You could even argue that because they are so low profile and have a very narrowly focused field of interest, they may be more trustworthy than most regular banks.

Some have claimed that captive lenders are more flexible than traditional financial institutions. Others believe they are less flexible in terms of their lending. In a way, both are true.

On the one hand, a brand’s house bank will have a vested interest in making a deal happen. After all, each loan generates a sale for a car which benefits its parent company. So, effectively, the brand benefits doubly.

On the other hand, captive lenders operate slightly outside the margins in a way. A lot of their financing is done through dealers without personal customer contact. This means they rely on strict rules and procedures for approving or rejecting an application.

Which means they are indeed, in a way, even less flexible than traditional banks.

A fascinating history

Today, car financing is an integral part of the industry. It seems perfectly natural that we can enter a dealership and leave not just with a new vehicle, but a full-fledged loan contract as well. Things weren’t always like this, however.

In fact, when General Motors founded the world’s first captive lender in the early 20th century, this was an unheard-of move. It was also a necessary one. More and more customers were being turned down by banks and each time a bank said no meant one car less sold. Car companies saw their profits dwindle. Something had to be done.

To turn the tide, GM set up the General Motors Acceptance Corporation. Many may first have considered the idea absurd. Less than a decade later, the GMAC was one of the car industry’s biggest success stories. Not only was it making a lot of money. It also turned the entire way people bought cars upside down:

In 1928, mainly thanks to its efforts and the imitators it created, three quarters of all cars were sold on finance. And the GMAC had become one of the 15 biggest lenders in the USA.

Others follow

The competition had to follow suite or risk being swept away. Still, it would take quite a while for them to come up with a response. It is hard to establish the reason for the GMAC’s longstanding monopoly. It seems that setting up a bank from scratch is not an easy thing to do.

Or maybe most makes simply did not realise that the GMAC’s triumph was not a one-off success story, but actually the key to selling more vehicles.

Either way, Volkswagen (1949) and Ford (1959) were next in line. The banks of both manufacturers have survived until the present day. The GMAC, meanwhile, had to restructure itself completely and is today called Ally Finance. (and, arguably, although still a captive lender, not the same company it used to be)

Gradually, all major makes followed: Mercedes in 1987, Honda in 1998, the Toyota Financial Services Corporation in 2000.

It isn’t hard to understand why car makers, although somewhat sluggishly, have all come around and introduced their own captive lending corporations:

1. They enable credits which might otherwise not see the light of day.

This was the original reason for GM to set up the GMAC. And it may only have become more relevant over time. As banks are bound by increasingly strict lending rules, the market has diversified.

Today, you have more choice than ever when it comes to car finance. From payday lenders to buy here pay here lots, from peer2peer networks to HCP and PCP, everyone wants a piece of the pie.

Ironically, it seems as though most customers would rather stick to the old banking system if only they could.

Captive lenders are one way of making this happen: Even if you’ve been rejected with a bank, you may still be able to get finance through a captive lender – and quite possibly at a better rate at that.

2. They raise profits.

Selling cars has served automobile companies well. In fact, over the decades, they have grown into some of the biggest enterprises of the planet. Each of the major brands is like a self-sustained ecosystem with its network of suppliers and dealers. Entire branches depend on them.

And yet, there is even more money to be made in finance.

Combine the two and you’ve got a recipe for riches.

The great thing about setting up your own captive lender is that it keeps profits within the corporation. Even if a bank does accept a loan proposal and thereby generates a sale, interest paid on the credit still goes towards the bank. If, however, a captive lender signs responsible for the deal, they can keep all profits to themselves.

3. They motivate consumers to buy new.

One of the most significant arguments why captive lenders have been such a benefit for car brands is that they inspire drivers to buy a new rather than a used car.

Think about it: If everyone decided to opt for a second hand vehicle tomorrow, the entire industry would break down. Car makers may get the biggest piece of the pie, but they only get it once. A dealer, on the other hand, makes money each time he sells a car, used or new. Potentially, he can even sell the same vehicle several times to different customers.

Manufacturers have introduced their own certification systems to improve on this somewhat. The idea behind these certified pre-owned cars is that you can buy a used vehicle that has been personally checked by the producer according to a standardised list. Also, these cars tend to have an extended  warranty, which makes them considerably safer than a regular second hand model.

But it goes without saying that a new car makes most money for the brands. Which is why captive lenders are so great for them: By luring people in who might otherwise have opted for used to spend more on a new car.

Why captive lenders are great for you, too

It may be nice for car brands that their own banks are doing so well. But why should you care?

For a very simple reason: Captive lenders can be very helpful for you as a buyer.

There are quite a few advantages to getting credit from a captive lender: Same deals for everybody, clear rules and terms, helpful for bad credit car finance and potentially better terms.

Let’s look at them in turn.

Same deals for everybody

Same deals for everybody - Concept Car Credit
With some banks and dealers, a loan application can seem like the lottery: Maybe you’ll get lucky and they’ll offer you a great interest rate. Or maybe they won’t even consider you for a loan at all.

What’s most disturbing about this isn’t so much how inherently unfair it is. Mostly, these erratic policies make it impossible to plan ahead. You could walk out of the negotiations with the deal of your dreams – or absolutely nothing at all.

With captive lenders, things are usually a lot more predictable. As we mentioned, these companies don’t usually work with you directly. Instead, they operate mostly behind the scenes and through mediation by a dealer. (Although we should note that this isn’t always the case. You can, in fact, apply with most of these banks in person if you so wish.)

You shouldn’t expect any exceptions in your favour, as we mentioned. But neither will there be nasty surprises. You know exactly what to expect. For most, that is a good thing.

Clear rules and terms

With many banks, the application procedure is really a black box. You enter personal information on one end and then receive some kind of result on the other. What happens in between remains a mystery.

Captive lenders are not open books in the true meaning of the word. But their processes and procedures tend to be transparent at least.

The big benefit of this is that it allows you to optimise your application. If you know what a lender wants from you, you can specifically target that area and make improvements.

More flexible when it comes to bad credit deals

The thing to remember is that while banks can sometimes seem indifferent about whether or not to strike a deal, captive lenders have a vested interest in helping you. After all, each deal struck is also a car sold.

This is why many captive lenders have less strict rules when it comes to bad credit car finance.

Obviously, they won’t just blindly grant finance to anyone. They certainly won’t guarantee you a loan either. (More exactly, this isn’t actually allowed in the UK at present) Captive lenders are no subprime lenders and they will generally consider your credit rating just like any other bank would.

However, they may be able to grant you a loan which many banks would have denied to you.

All in all, the differences won’t be huge. But in many cases, they can make that decisive difference between walking home with a sad or happy face.

Potentially better terms

What’s more, captive lenders may be able to give you a better deal than many traditional banks.

Why is this, you may ask.

Well, as we mentioned a few times before, captive lenders really want a deal to go through. So they are usually willing to meet you half way rather than trying to pursue an aggressive strategy. They are also mindful of the overall brand and will want you to feel good about the experience.

Captive lenders are furthermore in a better position to give you better terms, since they already generate healthy profits and therefore have more leeway. This is very similar to part exchanging your car at a dealer: They may be able to give you a better price for your new car, because the overall deal is so attractive for them.

Captive lenders: Disadvantages

So far, we’ve painted the sky pink. For a good reason: Captive lenders really have made car finance better and demonstrated that the traditional banking model can still yield good results.

But it is not a panacea by any means. Just like everything else, captive lenders have their disadvantages. And if you’re serious about wanting to work with one, you need to know about them.

No direct contact

If working with a captive lender, you may not once get to see an actual human being. In fact, many deals are negotiated at the dealership from top to bottom, with the captive lender remaining entirely in the background.

This may or may not look like a disadvantage to you. But it is certainly very different from what you may be used to. It also means you will have to do all the negotiating with the dealer. This, too, need not be an issue. But it may not be to your personal liking.

More aggressive repossession?

It has sometimes been suggested that captive lenders are more likely to aggressively pursue a repossession in case of a default.

There is something to be said for this argument.

If you’re working with a traditional bank or credit union or if you’ve borrowed money through an online lender, cars loans are just one among many types of deals they’ll strike each day. So if you don’t comply, they may first go through a standard procedure of sending out reminders, then taking legal action and ultimately sending out the repo (wo)man.

For captive lenders, cars are their bread and butter. So if they are faced with a default, they may take far more specific and targeted action. Repossession is obviously the strongest threat they can make. So it does seem possible that they may resort to this earlier on in the process.

That said, we don’t have any concrete evidence that this supposition is actually true. It does make sense to be aware of the possibility, however.

Danger of over-lending

Over-lending is one of the most serious potential issues with captive lenders. On the one hand, it is absolutely wonderful that there are banks out there who will actively cater to the needs of those with bad credit. On the other hand, there is a very good reason why regular banks have become so cautious: If you have very bad credit, buying a precious item like a car could get you into serious trouble.

In many respects, the stricter regulation of the banking system was a concerted effort to protect consumers against themselves. If there’s one thing we learnt from the way consumers abused credit cards in the USA is that too much convenience and too easy access to credit can bring about a disaster.

In itself, there is nothing wrong with captive lenders and their policies. Just make sure you check your own creditworthiness. Or, to be put it simple: Be careful what you’re applying for – you just might get it!

Shorter loan terms

We said that captive lenders may be able to grant you better terms. Now we need to add a caveat to that. A loan with a captive lender may indeed be cheaper than what you can get elsewhere. But it may come at the price of a shorter loan term and higher monthly payments.

This is not a form of deception. It is, actually, common practise.

The longer you draw out the length of the term, the more expensive it gets. This is simply because interest accumulates over time. A shorter loan, on the other hand, will tend to be cheaper, because it also reduces the risk for the lender. She will, after all, get her money back faster. Especially with many of the currently popular very long loans, lenders really need to ask themselves: How can we know what things will be like in eight years from now?

Captive lenders can offer loans in various time frames. But especially when it comes to special offers, there may be a natural tendency to keep the term short. If you’re financially weak, this may be an issue. Make sure you can afford it.

Not ideal for second hand cars

Captive lenders are great for new cars. Thanks to their excellent terms and conditions, thousands of drivers have been able to afford a brand new car and get a fair and decent deal.

Through their certified pre-owned programs, manufacturers have also created an interesting option for those looking for a compromise between the affordability of used cars and the security of a new car.

At the same time, captive lenders are neither natural nor ideal partners for those with a really bad credit rating. If you can just about afford your basic needs, you should probably not even consider buying a new vehicle, great deal or not. Even a certified pre-owned would be too much of a burden in your situation.

Instead, you should look for the cheapest deal you can get. More often than not, this will be a used car at a bad credit car finance dealer.

And there is absolutely nothing wrong with that, either: Used cars are no bad excuse for a new model. They can be incredible to drive for many, many years. In fact, in some cases, they may be better than the latest model generation!

So, should you work with a captive lender?

So, should you work with a captive lender? - Concept Car Credit
Ultimately, a lot depends on your preferences. From our point of view, however, the rise of the captive lenders has not been uniquely positive. In a way, these companies have artificially increased access to new cars for many households, who really should have opted for a used one instead.

At Concept Car Credit, we take a more cautious approach. Everything is based on your needs. Which means: Longer loan terms, but lower monthly payments, resulting in a lower risk of a default.

Contact us now for a free offer. Our team are waiting for your call at 0800 093 3385. Or use our online contact form.


Are captive lenders banks?

Captive lenders are sometimes referred to as banks. In many cases, however, they are not, strictly speaking, the same thing.

Should you care? Probably not. Whether or not a financial institution is a bank or not matters because it determines the rules and regulations which apply to it. As a consumer, you enjoy a very high degree of protection when working with a bank. On the same note, this also makes it harder to actually get credit with one.

Although captive lenders are not by definition banks, they operate pretty much the same way. When working with them, either directly or through a dealer, you will hardly notice the difference.

Even if captives aren’t as heavily regulated, you do not need to be afraid of getting ‘ripped off’. Most brands use these financial offshoots to improve customer experience and will avoid negative feedback at all cost.

Are captives really cheaper than regular banks?

Captive lending enjoys some competitive advantages over dealer finance or regular banking. To captive lenders, finance is not just about making the highest possible profit. It is also about marketing. In close collaboration with the manufacturer and dealerships, they can set up deals with conditions other lenders simply can’t match.

At the same time, dealerships have other means of generating profits, as consultancy Roland Berger has pointed out – for example through repairing cars in their own garage – which allows them to reduce the cost of financing as well.

All in all, captives have been a positive influence for consumers in terms of loan costs. The additional competition has led to more choice and better deals in general.

What about certified pre-owned cars?

In the past captives would only extend credit for new cars. This has recently changed. The main drivers of second hand car finance have been certified pre-owned programs. As part of these programs, manufacturers will instruct selected mechanics to check used cars from its brand according to a strict list of quality criteria.

Consumers have the benefit of buying a car that has been thoroughly tested, repaired and cleaned and which also carries a fresh warranty. Although these cars are more expensive than most other used models, captives can support potential buyers by offering affordable finance.

Many drivers swear by the certified pre-owned stamp of approval. Certainly, they have raised the bar for what used cars can offer considerably. At the same time, these deals are fairly expensive and devalue many of the biggest benefits of used cars.

Whether or not they are for you depends on your preferences, needs and financial situation.

What are alternatives to captive lenders?

One of the points which have made captive lenders so successful is that they have found several different angles to approach consumers.

Although you could, theoretically, head over to one of their branches in person, that is not, actually, the way things usually work. Instead, captives mostly extend their services through a network of dealerships.

So, when you’re in negotiations, one of the offers from the dealer may actually come from a captive.

In this sense, you don’t need to actively search for ‘alternatives’ to captives. Simply select the offer that meets your needs best.

If, however, you want to find the cheapest deal possible for a used car and keep monthly rates low, it is probably wise to look for other partners. Your best bet is true dealer finance – for example through a second-chance lender. These companies will offer excellent cars for those with bad credit. They will also be able to set rates according to your specific needs.

3 June 2020 Concept Car