- 85% of new vehicles sold in the U.S. are financed or leased, with the remainder of buyers paying cash. Source: Experian Auto Count, Q1–3 2014, 2013
- Vehicle financing is offered by a number of institutions, such as banks, credit unions, and captive finance companies.
- Captive finance companies exist to support the manufacturer’s sale of a product, such as automobiles. Captives like Toyota Financial Services, Ford Credit, or American Honda Finance offer financing options to the buyers of their respective brands through their franchised dealerships.
- Consumers who finance their vehicle purchases can do so directly with a lender, such as a bank or a credit union, or directly from the dealership and indirectly through the dealership finance source. Consumers can negotiate financing details (rates and duration of contracts) just as they would negotiate the purchase price of a vehicle.
- Direct Auto Finance — Occurs when consumers approach a lending institution, typically a bank or credit union, to obtain financing for their vehicle, typically prior to completing the purchase at a dealership. Consumers are responsible for shopping to determine which financing source best suits their needs.
- Indirect Auto Finance — Occurs when consumers select a vehicle at a dealership and then work with dealer personnel to obtain financing from the dealership. After the financing is originated, the dealership sells the contract to an indirect finance source. In this situation, dealers often approach multiple lenders to obtain the financing option that best suits the borrower’s needs. Lenders compete for this business, as dealers usually work with a variety of institutions at any point, including captive finance companies, banks and credit unions. The dealership originates the credit, is the original creditor and then sells the contract to an indirect lender. Dealers typically receive some form of compensation for the work associated with originating the financing for the consumer and finding an indirect lender and selling the financing contract to that indirect lender.
- Banks and credit unions may have different business models than captive finance companies:
- Banks and credit unions — Can offer indirect lending services, but also offer direct vehicle financing as part of a broad range of consumer products (deposits, credit cards, mortgages, etc.).
- Captive finance companies — Offer vehicle financing to support the sale of the manufacturer’s product. Captive finance companies wish to satisfy customers in order to keep the customer loyal to the brand. Captive finance companies generally engage in indirect lending only.
- Some of the advantages of financing at a dealership include:
- Convenience — providing financing at the same location as the vehicle purchase, often during extended hours of operation.
- Ability to choose from multiple financing options. Dealers maintain relationships with a variety of banks and finance companies to enable dealers to offer consumers an array of alternatives.
- The ability to take advantage of special financing offers and programs. Manufacturers work with their captive finance companies to offer incentives that may include reduced financing rates.
- The in-dealership financing process often follows these steps, but may vary depending on state, the individual buyer, or dealership:
- The consumer selects the vehicle he or she wishes to purchase.
- The consumer completes an application for credit.
- The dealership enters into a contract with the consumer for the purchase of the vehicle. The dealership is the creditor on the contract.
- The dealer submits the credit application including contract details to one or more finance institutions. The financial institutions are indirect vehicle finance providers, since the dealer acts as an intermediary. This submission may be before or after the dealer enters into the contract with the buyer.
- The institutions evaluate the credit application using the information provided — which never includes information about race or ethnicity.
- Each institution decides whether it is willing to purchase the contract and informs the dealer.
- The dealership chooses which finance source approval to accept. The dealer then sells the finance contract to the approving indirect lender and that lender takes assignment of the contract from the dealer.
- The purchasing lender welcomes the consumer as a customer.
- The consumer makes payments to the finance source selected by the dealer.
- Indirect vehicle finance providers have no visibility to the customer’s race or ethnicity when making a credit decision. They base their credit decisions solely on the merits of the customer’s application and available credit reporting tools. By law, auto lenders are prohibited from requesting and/or making decisions based on protected class characteristics including information about an applicant’s gender, race, or ethnicity. Credit applications often ask for information such as:
- Social security number
- Date of birth (to determine whether an applicant has legal capacity to enter into an auto finance contract)
- Debt obligations
- Auto dealers rely on a multitude of financing options to allow customers across the spectrum of creditworthiness to purchase vehicles.
- Fewer lenders competing results in fewer options for consumers and would likely result in higher prices. For example, during the 2008/2009 recession, fewer lenders offered auto financing, curtailing credit for certain borrower segments.
Source: 2014 Report on Auto Sale and Credit Supply, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, http://www.federalreserve.gov/econresdata/feds/2014/files/201482pap.pdf
- Lenders compete both on the merits of the financing rates and terms they offer to dealers, and by compensating dealers for the time and effort to qualify the consumer and to enter into and document the financing arrangement with the consumer. This compensation comes in the form of a flat fee or an addition to the interest rate paid by the consumer. Additional interest that may be paid by a consumer to compensate the dealer for arranging consumer financing is known as “dealer mark-ups” or “dealer participation.”
- Certain banks and non-banks are subject to the Consumer Financial Protection Bureau’s (CFPB) enforcement authority, and the CFPB has specific authority to enforce the Equal Credit Opportunity Act (ECOA), implemented by Regulation B. This is the authority the CFPB uses to supervise, examine and investigate financial Institutions concerning fair lending practices.
- Banks and credit unions with over $10 billion in assets and non-bank larger participants in other consumer finance sectors (such as auto finance) are subject to CFPB supervisory authority.
- The CFPB’s supervisory authority allows it to conduct periodic examinations of an institution’s business, perform off-site reviews of that institution’s information, and conduct on-site interviews with the institution’s personnel. If the examiners find regulatory violations, they may refer these matters to the CFPB’s enforcement division for further action. If a “pattern or practice” of lending discrimination is found, the CFPB is required to refer the matter to the U.S. Department of Justice for further investigation.
- The CFPB does not have regulatory oversight of auto dealers. Auto dealers are instead regulated by the Federal Trade Commission at the federal level and by the states.
Toyota Financial Services is a service mark of Toyota Motor Credit Corporation (TMCC). TMCC is the authorized attorney-in fact and servicer for Toyota Lease Trust.
As of January 22, 2016
PDF VersionIn-Dealership Financing Process