The History of Car Loans – Borrowing from the Past

Are you buying a vehicle? Are you thinking of getting a car loan? As you do your research and collect all the information you need to make an informed decision, you’re probably not likely to sit back and say to yourself, "Hmm, I wonder where car loans came from." Not likely, right?

But now that we’ve mentioned it, aren’t you just a little bit curious? We found the history of car loans quite interesting. That’s why we’re presenting this information here. And in following this history, we’d like you to gain a working knowledge of car loans, so that when you go to get one, you’ll know where they came from, why they were invented, and how all that affects the transaction you’re about to undertake.

The history of car loans follows the history of cars

Everyone’s heard of Henry Ford – he invented the first automobile, right? Wrong. The first automobile was actually invented by a Canadian from Oshawa, Ontario, Sam McLaughlin. He went into partnership with American David Buick to mass-produce McLaughlin-Buick vehicles, preceding the Model “T” by about a year. Subsequently, car registration climbed from 178 in 1903 to just over 2,000 by 1908. That number had tripled within 2 years, but the horse and buggy were still the most common forms of transportation.

Then an extraordinary salesman and entrepreneur, William Durant, entered the fledgling automobile industry. William “Billy” Durant founded General Motors. Building on his success with a single automobile, he was the first to assemble a group of automobile companies, including McLaughlin-Buick, under a common management, and he was the first to introduce automobile financing – car loans. He even made a bid to buy Ford Motor Company and it was a done deal, except for the bankers’ distrust, which caused the deal to fall through. Billy Durant was a legend in the automotive industry and was inducted into the Business Hall of Fame in April, 1996. He’s also honored at the Automotive Hall of Fame in Dearborn, Michigan.

The first automobile finance company was formed

Billy’s success is ironic because he didn’t really care for cars. He thought they were smelly, noisy and frightening to animals. However, being the salesman he was, he realized there could be a good business in selling them.

So let’s look at why car loans were invented. In the early days of the motor vehicle industry, dealers had to pay cash to stock their inventory, so they could only buy a few cars at once. Then, with the onset of the assembly line, manufacturers wanted dealers to buy vehicles in large quantities so they could keep the factories running regularly. The only way to do this was to make it possible for consumers to finance their vehicles so the dealers could, in turn, finance the vehicles they bought from the manufacturer.

So Billy gave ordinary people a way to buy a car when the manufacturers of the time, including Henry Ford, believed that financing a new car would be the end of America. Boy, were they wrong! Billy was a man of vision, and his vision of automobile financing materialized in the form of General Motors Acceptance Corporation (GMAC), the first large non-bank financing source for automobile loans. In 1919, GMAC branches were opened in Detroit, New York, Chicago, San Francisco and Toronto. In 1920, they expanded to Great Britain. By 1928, they’d written their 4 millionth retail contract.

As the automobile industry expanded, so did the business of car loans. GMAC’s success in the car loan business was increasing rapidly. Check out the number of retail contracts they wrote, and how much they earned:

• 1958: 40 million contracts.
• 1977: 75 million contracts.
• 1985: 100 million and earnings of $1 billion.
• 2000: $1.6 billion in earnings.
• 2001: $1.8 billion in earnings.
• 2002: Nearly $1.9 billion in earnings.

Since its inception, GMAC has provided more than $1 trillion of financing for 150 million cars and trucks around the world. They’re now in 41 countries. Does that give you some idea of the massive size of the car loan industry today?

GMAC was only 1 finance company – others joined in

GMAC definitely led the way in the car loan business but, of course, the other major manufacturers recognized the profitability and entered the market. These companies are known as “captive finance companies”; that’s simply a term to signify that the lending company is wholly owned by the automobile manufacturer. Examples, other than GMAC, are NMAC (Nissan Motor Acceptance Corporation), Ford Credit (Ford Motor Credit Company), Chrysler Credit (Daimler-Chrysler).

The car loan industry was indeed profitable and, as usual, there are always companies looking to increase profitability. Commercial banks were no exception – they’ve entered into the extremely competitive car loan market, and are increasingly standing tough against the challenge from the below-market rates offered by the financing subsidiaries of the captive finance companies. The Federal Reserve Board in the U.S. reports that commercial banks controlled 43% of all auto finance loans outstanding.

And now, independent companies are joining the rush. One example is PeopleFirst Inc, founded in 1995 and based in San Diego, California. Capital One, the credit card provider, recognized PeopleFirst’s success and snapped them up. PeopleFirst changed its name to Capital One Auto Finance in June 2003, and now it’s the largest Internet auto lender.

Car loans today

Today you can get a car loan at a dealer, or you can join the hundreds of thousands of people who apply online for their car loan. The process is the same – your credit history and credit score are checked, along with your current and past personal information, and a decision is made by the lender whether you’re willing and able to repay the loan. And in regards to applying for that loan, we’ll close with a quote from Billy Durant: “Forget past mistakes. Forget failures. Forget everything except what you’re going to do now and do it.” That’s a fitting statement – you’ve got the education; now just go and do it!

About The Author

Gareth Marples is a successful freelance writer providing valuable tips and advice for consumers purchasing a home equity loan company, first usa visa credit card and saving money ideas. His numerous articles offer moneysaving tips and valuable insight on typically confusing topics.