Generally when a consumer is ready to purchase a car, they will meet with a lender in order to get approved for a loan. While this has been the norm, auto manufacturers are starting to play a bigger part in financing.
The American financing divisions for some of the major car makers, Toyota, Honda and Ford, issued half of all new car loans in the first quarter of 2014, according to credit bureau Experian. This is up 37 percent from the first quarter of 2013 and represents the largest amount in over four years. Along with the new loans, these car companies also write a majority of the leases. During the first quarter, these automakers wrote a record 26 percent of the leases, up 23 percent from the same time period in 2013.
This new wave of financing is supposedly making it easier for prospective buyers to get behind the wheel of a car, according to Reuters. The financing divisions for the automakers are getting subsidies from the manufacturers and extending loan terms, which is contributing to lower monthly payments. Many banks and financial institutions are trying their best in order to give out more auto loans.
Wells Fargo has made a deal with General Motors to provide subsidized loans, while U.S.. Bancorp just started to issue loans for used cars, something the automakers are not interested in.
The activity is starting to make some economist nervous about whether this is a sustainable business model. In the event that interest rates increase, automakers may back off from issuing loans because it would tap into their profits.
But the new business model has been successful so far, as car sales reached an annualized rate of 16.8 million in May.