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A captive finance company is a subsidiary company established for the purpose of providing credit to customers of the parent company. This is designed to facilitate financing for consumers making big purchases like appliances and vehicles. Captive finance companies are either owned or controlled by the parent company, depending on how they are structured, and they exist solely for the benefit of the parent company.
One of the most common examples of a captive finance company is a credit card company that provides store charge cards. Department stores often offer store cards to their customers and people can also obtain store cards for grocery stores and other types of stores. Customers can often apply on the spot when making a big purchase and may be offered an incentive such as a discount off the sales price or a savings card that will apply to future purchases.
Another example is financing offered through an automobile manufacturer. Many car manufacturers have captive finance companies that provide credit to people buying their cars. Likewise, manufacturers of appliances and expensive equipment may also use such companies. The captive finance company exists to make the company's products more affordable for consumers and to ensure that the company will have a steady supply of buyers. Without credit of this nature, some purchases might be out of reach for consumers. Captive finance companies may also offer credit to customers who might not be able to get loans otherwise, thus opening up the market of potential customers.
Having a captive finance company allows a company to extend credit to customers without putting itself directly at risk. Smaller businesses may offer things like store charge accounts directly to customers without an intermediary. The problem with this is that when borrowers default, the company takes the loss directly. With a captive finance company, such losses are incurred by the subsidiary. Acting as a finance company, it can also make investments and take other steps to make money for the parent company and mitigate risks from consumers.
People who receive financing through a captive finance company should be careful. The interest rate may be higher than another type of loan such as a bank loan. In addition, such loans may come with misleading or unfavorable terms. For example, people may be informed that they don't need to make any payments for a year, but they will not be alerted to the fact that interest accrues during this period.