AmeriCredit to Become 'Core' of GM's New Financing Arm

General Motors is reentering the captive auto financing business. The carmaker has agreed to purchase subprime-loan specialist AmeriCredit Corp. for $3.5 billion in cash.

In a statement released Thursday, GM announced that the purchase “establishes the core of a new GM captive finance arm” and will help reach additional buyers through loans and leases to borrowers with credit challenges.

GM had toyed with the ideas of buying back its former financing division GMAC LLC, collaborating with external lenders to provide buyers with more financing options, or starting its own bank, according to three sources familiar with the discussions. Purchasing GMAC, now known as Ally Financial, or beginning a new, in-house banking division proved too challenging at that point, the sources say.

“This helps GM finance less-than-perfect-credit buyers and God knows there's plenty of them today with economic conditions as they are,” noted Joe Phillippi, principal of AutoTrends, a consulting company in Short Hills, N.J. “A lot of people in the vast heartland of this country don't have particularly great credit histories and that region has been the core of GM's strength.”

GM CEO Ed Whitacre wanted to purchase or begin a finance arm before the company’s fourth-quarter initial public offering, sources close to the matter said in May. The carmaker decided a deal could not be arranged before that deadline, sources with firsthand knowledge reported earlier this month.

“Adding AmeriCredit to our team will improve our competitiveness in auto financing offerings,” said Whitacre in the statement.

Both companies’ boards have given the deal their approval. GM reported that the transaction would close during the fourth quarter after approval from AmeriCredit’s shareholders.

The Aftermath of GMAC

The deal would provide GM with a captive financing arm for the first time since the 2006 sale of its controlling interest in GMAC.

GM dealerships have said that since the sale of GMAC, stricter financing terms have hurt sales in an American car market that has not shown the robust recovery many predicted for 2010.

The carmaker receives roughly four percent of its sales from subprime buyers, compared to approximately seven percent for the auto industry as a whole, according to CEO Chris Liddell during a briefing Thursday at GM’s Detroit headquarters.

Likewise, the automaker sells seven percent of its vehicles through leasing deals, compared to 21 percent for the entire industry, he reported. Liddell believes GM can expand sales by increasing their participation in both financing options.

“When you look at the population, about 40 percent falls into non-prime,” Liddell explained. “We think it will help. Four percent of our sales are to non-prime customers. If you just hit a modest increase from 4 to 5 percent, it's a significant number.”

GM will keep working with other lenders while AmeriCredit supplies a “single-digit” percentage of GM’s auto financing, Liddell reported.