Auto retailers’ interest in captive offerings could spur growth for subprime lenders

PLANO, TEXAS – Subprime auto lenders may have an opportunity to capture business from dealer groups who plan to build their own captives, but recent acquisitions by automotive companies suggest those opportunities may be limited.  

As a lender, “if [a public dealer] is starting their own captive business, I would immediately pick up the phone and ask, ‘Can we collaborate on the nonprime area?’” Klaus Entenmann, senior advisor for future of mobility at Deloitte, said Thursday at the Non-Prime Auto Financing Conference in Plano, Texas, noting retailers who build their own captives typically focus on the prime market. 

CarMax Auto Finance, for example, finances primarily prime consumers, opting to allow other lenders to finance consumers with lower credit scores through a tier-based arrangement. Under the structure, lenders in tier 2 pay a participation fee to offer financial packages in CarMax stores, and tier 3 lenders are offered discounts in order to incentivize them to finance vehicles purchased at CarMax. CarMax occasionally amends the program’s structure. 

In the wider industry, many prime lenders have “pass-through agreements” with subprime lenders that allow consumers who do not qualify for prime loans to be passed through to subprime lenders for financing. Nissan Motor Acceptance Company, for example, has a pass-through agreement with Global Lending Services and Santander Consumer USA.  

Retailers opt to acquire subprime lenders 

Still, opportunities to partner with retailers looking to form their own captives may be slim as retailers weigh the benefits of purchasing rather than building a captive arm.  

Vroom and Stellantis, for example, both opted to acquire subprime lenders to establish their own captive finance companies and build out a prime offering over time. Vroom acquired United Auto Credit Corporation in February to expand the company’s presence in nonprime, while Stellantis purchased First Investors Financial Services in November 2021 to establish a captive and build out its prime offering.  

General Motors, too, acquired subprime financier AmeriCredit in 2010 and has since built out its prime and floorplan offering.  

At least three retailers, including Asbury Automotive, AutoNation and Penske Automotive Group, have indicated they are interested in creating a captive finance offering to capture additional revenue.  

AutoNation, for example, is looking to purchase a captive, Chief Executive Mike Manley said on the retailer’s Q4 2021 earnings call. “I think it’s important for the largest automotive retailer in the country to be able to offer finance through a captive where we can tailor-make services,” he said. 

Asbury Automotive and Penske Automotive have also publicly expressed interest in forming their financing arms following profitability growth spurred by increased demand for vehicles amid low supply, but little detail was provided as to whether the companies would build out their own captive or acquire one. Asbury management did note that the retailer planned to use the captive to expand further into the subprime market.  

The 23rd annual Big Wheels Auto Finance Data 2022 report is now available, providing exclusive statistics on the auto lending and leasing industry and a ranking of the top 200 auto financiers in the nation. Order your report.