In 2016, some industry analysts believed that automobile sales had reached a peak and might begin to decline. JPMorgan Chase CEO Jamie Dimon was quoted in an article in the Wall Street Journal as worrying about the possibility that auto finance companies might be facing “higher default rates from increased subprime lending [and] the growing use of longer repayment periods for borrowers.” But the article also quoted the CEO of Ally Financial, one of the largest auto finance companies, as saying: “We know fully what we are originating … there are no skeletons in the closet.”
a. What is an auto finance company?
b. What advantages might automobile dealers gain from using a finance company, rather than a bank, to finance their purchases of cars from the manufacturer and their customers’ purchases of cars from the dealers? What advantages might customers gain?
c. What does the CEO of Ally Financial mean by saying that the company knows “fully what we are originating”? Why might Jamie Dimon have been worried about the types of loans auto finance companies were making, given the circumstances in the auto market in 2016?