Captive lending: what it is, how it works, pros and cons – Business Insider | CarTailz

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  • Captive lending is a form of self-financing commonly found at car dealerships.
  • This type of lending is convenient and often more flexible than other financing options.
  • You may pay a higher price or interest rate with captive lenders than with other lenders.

If you’ve ever bought a car, you might have used captive lending — a type of internal financing that car dealerships commonly offer.

According to Experian, around 46% of new car purchases this year were financed through this type of financing. Two years ago it was almost 60%. Considering a proprietary lender for your next purchase? Here’s what you should know about this practice and its pros and cons.

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What is captive lending?

Captive lending, sometimes called in-house financing, allows customers to finance a purchase directly through a lender’s subsidiary and spread the cost (plus interest) over time. As a rule, you apply for self-financing on site at the point of sale.

“If you’re at a dealership ready to buy a car and the dealership says they can help you pay for that car with an internal loan, that’s an example of self-financing,” says Howard Dvorkin, author , Certified Public Accountant (CPA) and Chairman of

Consumers most often encounter captive lenders at merchants, but retail businesses also sometimes offer them. Common industries that use equity financing include:

  • Medical Suppliers or Vendors
  • Higher education and trade schools
  • wholesale clubs
  • buyers clubs
  • Heavy Equipment Suppliers
  • Home improvement company
  • Musical instrument retailers
  • spas

A company may offer equity financing for many reasons. It can create an additional stream of income, limit its risk or differentiate itself from competitors.

“They may want to gain a competitive advantage over other vendors in their industry,” said Shaun Lucas, CEO and president of Monterey Financial Services. “Traditional credit options available to consumers are often limited when it comes to duration, interest rates, prepayment options and risk assumption. The internal financing option gives the company more control over the financing terms offered, which further simplifies the work for the customer to buy.”

What are the advantages of self-financing?

The biggest advantage of self-financing is the greater flexibility to adapt the terms to the client’s needs and budget. The company also has more control over underwriting the loan, which can help consumers — particularly those with lower credit scores — qualify more easily.

“It can be a good option for a person trying to build credit as they may be approving someone that a traditional lender may not be approving,” said Carlos Legaspy, President and CEO of Insight Securities.

Captive lenders are also handy, and often have unique rebates, rebates, and promotions — like an introductory 0% APR — that aren’t available with more popular financing options. These perks can save consumers money, both upfront and in long-term interest.

You may have to choose between promotions (such as a lower interest rate or a cash rebate) when using a captive lender. Also, your introductory price may only be valid for a limited time. Read the fine print and know when and by how much your interest rate can go up.

What are the disadvantages of self-financing?

According to the Consumer Financial Protection Bureau, self-financing can sometimes come with inflated prices and higher interest rates compared to other types of financing.

You may also encounter aggressive upselling tactics with captive lenders, which may mean buying costly add-ons or upgrades that you don’t have or need the money for.

“The main downside is that interest rates tend to be higher and can lead an undisciplined buyer to buy something they can’t afford,” Legaspy says.

Is a Captive Lender Right for You?

Own lenders may be smart for some consumers, but they’re not for everyone. The right choice depends on the type of car you are considering, your budget, credit history, and other factors. Also, not every dealership offers in-house financing, so a captive lender could limit what make of car you can buy.

If you’re not sure about the right step to take, speak to a financial professional or credit advisor who can advise you.

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