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What is a captive finance company?
Captive finance companies are financial institutions that offer their services to customers of some retailers in order to let the customers buy the retailer’s products.
Captive finance companies are wholly owned subsidiaries of retailing or manufacturing firms that help customers finance big purchases. They offer a broad variety of services from full-scale banking to basic card services. Captive finance companies may be significantly profitable to the parent company.
The primary purpose of captive finance companies is to fund the products of the parent companies by essentially extending credit to their customers. This funding enables the parent companies to increase sales and avoid the struggle with outsourcing funds from outside lenders with above-the-board requirements. Parent companies also benefit from the interest charged by the captive companies.
Captive finance companies do not provide the conventional cash loans. Therefore, they provide better terms to their parent companies due to the minimal risks involved in the funding. This allows the financing company to offer relatively better deals, which may include lower interest rates and cash rebates.
Captive finance companies also offer easier financing solutions for damaged credit. This can help boost corporations that are ineligible to access loans from other financial institutions because of income or credit issues.
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Captive finance company example
Johnnie wants to buy a car. He likes a particular brand of car, and finds that when he goes to the dealership that the automaker owns a captive finance company, which will issue him a loan. Johnnie enters into a loan-like situation where he finances his new car directly from the captive finance company owned by the automaker.