Does Trade Policy Affect Consumer Credit? The Role of Captive Finance Lenders

Captive finance subsidiaries, vertically integrated lenders, create a potential channel for trade policy to affect consumer credit. Examining the Trump administration 2018 metal tariffs’ impact on auto manufacturers, we find consumers received worse auto loan terms from captive lenders after the tariff relative to unaffected non-captive lenders. The average interest rate on captive loans increased by 26 basis points while average loan amounts, loan maturities, and loan-to-value ratios decreased. The worse loan terms represent a tightening of credit along the intensive margin, not a shift in the composition of borrowers. Further, we document a disparate impact on low-income borrowers and in areas with less lending competition. Overall, our results suggest not only that captive finance divisions enable tariff cost pass-through to consumer finance but also that focusing solely on directly affected product prices may underestimate the impact of tariffs