Now that we’ve mentioned it, aren’t you just a little curious?
We found the history of car loans quite interesting. We’re sure you will too!
In following this history, we’d like you to gain a working knowledge of car loans so that when you apply to finance one:
- you’ll know where they came from,
- why they were invented, and
- what can affect the transaction you’re about to undertake.
The subject of car finance comprises all the different financial products that allow someone to acquire a car with an arrangement other than a single lump cash payment.
Whether you are an individual or running a business, most people require finance to purchase one or more cars throughout their lifetime.
The provision of car finance (by a third party supplier) allows the purchaser to raise funds to pay the previous owner (either a dealer or manufacturer) for the vehicle.
The history of car loans is really quite fascinating because it follows the history of cars.
Henry Ford was NOT the first!
Most people believe the American, Henry Ford, invented the first automobile but actually it was Sam McLaughlin, a Canadian from Oshawa, Ontario.
In partnership with another American, David Buick, Sam began mass-producing McLaughlin-Buick vehicles a year before the first Model T.
In 1903 just 178 cars were registered in the United States. By 1908 this figure had climbed to just over 2,000, even though the horse and buggy was still the most common form of transportation.
Then an extraordinary salesman and entrepreneur, William (Billy) Durant, entered the fledgling automobile industry. Billy founded General Motors and building on his success with a single car, he was the first person to assemble a group of automobile companies, including McLaughlin-Buick, under a common management.
Billy even made a bid to buy Ford Motor Company and the deal only fell through because of the bankers’ distrust. Billy Durant was a legend in the automotive industry and was inducted into the Business Hall of Fame in April 1996. He is also honoured at the Automotive Hall of Fame in Dearborn, Michigan.
Ironically, Billy didn’t really care for cars because he considered them to be smelly, noisy and frightening to animals. Despite his personal prejudices, Billy was enough of salesman to know there was plenty of money to be made from selling them!
Why the first car finance company was formed
Billy was also the first person to introduce financing specifically designed for the purchase of a vehicle, a concept created as the solution to a very specific problem.
‘All the manufacturers of the time believed the concept would never work.’
In the early days of the motor vehicle industry, dealers had to pay cash to stock their inventory. This restricted the number of cars they could purchase at one time. But once the assembly line came into operation, 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 then pay for the vehicles they bought from the manufacturer.
Billy gave ordinary people a way to buy cars
All the manufacturers of the time, including Henry Ford, believed the concept would never work. But undeterred, Billy created 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 and by 1928 they had written their 4 millionth retail contract.
As the car industry grew, so too did the business of car loans. In 1958 GMAC wrote 40 million contracts. By 1985 this figure increased to 100 million contracts and the company’s earnings were $1 billion. By 2002, earnings had reached nearly $1.9 billion.
Since its inception, GMAC has provided more than $1 trillion of financing for 150 million cars and trucks around the world. They now operate in 41 countries. It is remarkable how one man’s vision can create a business of this size, but even more remarkable to think he created an entirely new finance concept.
Where Billy went others followed
Once the other major car manufacturers saw the success GMAC was experiencing, they quickly entered the market. These companies are known as ‘captive finance companies’ – a term for lending companies fully owned by an automobile manufacturer. Today, all major car manufacturers have their own captive finance company.
The next to enter the market were the commercial banks, and then independent companies joined the fray.
Australian car loans
Nearly a century after Billy introduced car loans, how they operate has not significantly changed from his original concepts. Car loans normally begin at the time of purchase. A financier provides the funds for the customer to purchase the car and takes an interest in the vehicle as security for the loan.
The customer takes ownership of the vehicle and when the contract is completed, the customer is given clear title.
‘A finance broker can provide impartial advice on the package best suited to your situation.’
Today, for a car to be eligible to be used as security, certain criteria normally applies. New cars may have to be purchased from a dealer, and some lenders limit the age of used cars. Many will limit the amount lent on used cars, rather than lending the full purchase price.
One of the major advantages of a car loan is the interest rate can be lower than an unsecured loan, because the car can be seized in the event of default. Other advantages include flexible contract terms, a balloon value can be applied and interest rates can be fixed or variable.
What has changed from the early days of GMAC is the myriad of options available to the consumer. Many will be overwhelmed with the range of available deals, all seemingly offering the best value for money.
It is hard for the average car buyer to assess the available options and this is where a finance broker can be invaluable.
Our broking services can provide impartial advice on the package best suited to your situation.