In the world of auto finance, the recent collapse of several subprime-specialized dealer-lender chains and the implosion of America's Auto Mart has raised questions about the health of the industry. While subprime lending may not be for the faint of heart, it's only a small part of the larger auto finance landscape. But what does this mean for the broader market? Let's take a closer look at the numbers and explore the implications.
First, let's examine the total balances of auto loans and leases outstanding for new and used vehicles. According to the New York Fed's report on consumer credit, based on Equifax data, these balances rose by $15 billion in Q1 from Q4 and by $43 billion (+2.6%) year-over-year, to $1.68 trillion. This may seem like a positive trend, but it's important to consider the context. In the five years from 2020-2024, auto loan balances had surged by 23%, despite much lower vehicle sales, driven by the price explosion of new and used vehicles in 2021 and 2022. This raises a deeper question: are we seeing a bubble in auto lending?
One metric that can help us evaluate credit risk is the debt-to-income ratio. In Q1, the auto-loan-to-disposable income ratio dipped a hair to 7.17%, the lowest since 2014, except for Q1 2021, when various government payments directly to consumers distorted disposable income into absurdity. This may seem like a positive trend, but it's important to consider the implications. Subprime means "bad credit" and a low credit score, but it does not mean "low income." It means a history of having defaulted on loans, rent, utility bills, etc. The young dentist that got into it over his head and fell behind is a classic example of a high-income borrower with a subprime credit rating.
The delinquency rates of subprime & prime auto loans are also worth examining. The 60-day-plus delinquency rate of subprime auto loans that have been packaged into ABS has been running at record highs, starting in 2023. In January 2026, the delinquency rate was a record 6.90%, up by 34 basis points from January a year ago. This raises a deeper question: what does this mean for the broader market?
One thing that immediately stands out is the contrast between subprime and prime auto loans. While prime auto loans are nearly always in good shape, with a low delinquency rate, subprime loans are facing significant challenges. This raises a deeper question: what does this mean for the broader market?
In my opinion, the subprime business is very unforgiving when these dealers-lenders take reckless risks – the results of which we’re now seeing. Last year, a couple of bigger companies involved in this business imploded, most spectacularly Tricolor amid a mushroom cloud of fraud allegations. This raises a deeper question: what does this mean for the broader market?
Overall, the data suggests that the auto finance market is facing significant challenges, particularly in the subprime sector. While the broader market may not be in immediate danger, it's important to monitor the situation closely. In my opinion, this raises a deeper question: what does this mean for the broader market? What are the implications for consumers, lenders, and the broader economy? Only time will tell, but one thing is clear: the auto finance market is facing significant challenges, and it's important to stay informed and prepared for whatever comes next.
