A captive finance company is a subsidiary that provides financing to customers buying the parent company’s product. Most of the time, captive finance companies are wholly owned by the parent company; otherwise, they are partially owned.
Some of the most readily recognized examples of captive finance companies are in the automotive industry.
When buying a car from GM, Chrysler or Ford, people know that one of their options is to get their car loans from the captive finance companies of these three automakers. These include or have included: GM Acceptance Corporation (GMAC), Chrysler Financial, and Ford Motor Credit Company.
Due to the relationship between the automaker and the financial institution, it is much easier or convenient for buyers to just get their car loan at the same place where they bought the car, especially since they tend to overlook bad credit histories.
Another example of captive finance companies would be in the real estate industry, wherein a parent company can own both a real estate development as well as a bank. Again, in cases like this, the bank then offers in-house financing.
Note though that the convenience can come at a price, and a steep one at that, since interest rates can be much higher when getting a loan from captive finance companies. Hence, it is always best to read the fine print before signing anything.
