PIN: Federal Rate Cut May Ignite More Captive Incentives

WESTLAKE VILLAGE, Calif. — The recent decrease in the Federal Bank Reserve rate may ultimately lead to more market demand as annual percentage rates for captives and non-captives drop to reflect the change, according to Power Information Network, an affiliate of J.D. Power and Associates.

"Since the interest rates used for new-vehicle loans by both captive and non-captive finance sources tend to move in tandem with the Federal Funds Rate, we can expect APRs for both to decline as the Federal Reserve Bank continues to reduce the Federal Funds Rate in the near future," explained PIN.

However, while advantageous to consumers, this trend could hurt captives as they are forced to add more incentives to better compete with non-captives.

More specifically, executives said, "The non-captive rates tend to be more strongly correlated with the Fed rate than the captive rates since the latter are subject to various incentive interventions by their operating companies to prop up consumer demand."

This means, as the federal rate is trimmed, non-captives will tend to also decrease their rates, which may put captives in a less competitive position.

"This may spur the captives to offer additional incentives to retain their share," officials pointed out. "Overall, the lower rates charged by all finance sources will increase consumer demand and provide a spark for the industry, assuming everything else remains the same."

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