How the world of car finance began
6 July 2023
By Joy Pearson
Consumer credit has become an integral part of our lives, enabling us to make purchases beyond our immediate financial means. While we may take credit for granted today, it was not always the case. In the Civil War era, installment sales emerged, and by the late 1900s, installment plans were often used to purchase consumer goods such as washing machines. However, the auto industry became the driving force behind the widespread use of credit. Since then, the auto lending industry has gone through a series of significant events that have shaped the industry as we know it today.
In 1919, General Motors formed the General Motors Acceptance Corporation (GMAC) to offer car loans to customers. The idea was conceived by GM President Alfred P. Sloan to make it easier for consumers to purchase cars without requiring a significant upfront payment. GMAC began in five large cities in North America and later expanded nationwide, branching out into banking, insurance, mortgages, and commercial finance. Initially, GMAC required customers to pay 35% of the car's cost as a down payment and the remaining amount in installments over a year. This approach allowed GMAC to recover its loans quickly before customers started paying for car repairs.
Ford Motor Company diverged from General Motors by implementing the weekly payment plan, an installment loan that required a down payment and weekly payments ranging from £5-£10. This plan allowed customers to make payments into a local dealer's account, and only after the full purchase prices was deposited could the customer take delivery. However, this plan become less popular as Americans began to desire credit and refused to wait. This shift helped General Motors surpass Ford as the leading car manufacturer. In 1928, Ford established an auto loan subsidiary that allowed customers to establish installment loans and take delivery simultaneously. By 1930, about two-thirds of all cars were bought on credit. Ford Motor Credit Company LLC was established in 1959 to take over car financing/leasing operations for customers and dealerships. Ford credit remains under the ownership of Ford Motor Company, while the financial units of GM and Chrysler have been spun off.
Over time, car finance brokers have become more specialised and began working exclusively with car buyers to help them find the best possible financing options. As the auto industry grew, so did the demand for car finance brokers. Today, brokers are an essential part of the car buying process, and many consumers rely on them to help secure financing for their vehicles. The rise of the internet and online lending has also had a significant impact on the car finance broker industry. With more and more consumers shopping for cars and financing online, brokers have had to adapt and develop new ways of serving their clients. Many brokers now offer an online application process and can quickly connect consumers with a wide range of lenders.
Despite these changes, the core principles of car finance remain the same. Brokers work with their clients to understand their financial situation and needs, and then help them find the best possible financing options from a range of lenders. By providing personalized service and access to a wide range of financing options, car finance broker continue to play an important role in the car buying process.