Toronto-Dominion Bank's planned acquisition of Chrysler Financial is an indication of where the auto finance industry is headed.

Namely, it underscores the melding of traditional lenders and captive finance companies.

"The lines between banks and captives and financiers these days are definitely blurring," said Melinda Zabritski, director of automotive credit for Experian.

Paul A. Cuevas, director of auto finance at JD Power & Associates, agreed, saying "most of the captive companies now have a bank and the logic is being able to raise and grow deposits … to lower the cost of funding." At the same time, many banks and finance companies have created arrangements with certain manufacturers to perform captive-like functions, he said, to gain access to a bigger portion of the business from dealerships.

Banks have tended to do more used car sales, while captive companies have had a larger share of the new car sales and leasing businesses, Cuevas said.

The deal to buy Chrysler Financial "brings some of that captive expertise over to the bank arena," he said.

Captive finance companies have traditionally been owned by the car manufacturers themselves. But over the last few years, these entities have undergone a lot of changes as the auto industry weathered the recession and restructured. Captive companies like GMAC, once a part of General Motors Co. and now known as Ally Financial Inc., were spun off into their own entities. Ally has since diversified into other areas of consumer finance.

General Motors recently signaled the importance of having a captive finance arm with its purchase in July of subprime auto lender AmeriCredit Corp. for $3.5 billion.

The overwhelming majority of the auto finance market is made up of indirect lenders, like dealers, that serve as middlemen between banks or finance companies and borrowers. A smaller portion of the market is served by "direct" lenders, or those that negotiate directly with borrowers, typically credit unions and small community banks. The market share of direct lenders has been shrinking.

According to a joint report from Experian and Oliver Wyman, as of the third quarter, banks controlled nearly 36% of the auto finance market with $225 billion of loans outstanding out of the more than $600 billion total. Captive auto companies, or those affiliated with car manufacturers, held about 28% of the market with $190 billion outstanding; credit unions about 20% of the market with $144 billion; and other finance companies, including "buy here, pay here" dealers, held about 17% of the market with $73 billion of outstanding loans. Credit unions saw their market share drop about 20% from the same period last year, the study said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.