The high-risk, high-profit ecosystem of subprime auto loans is not for the squeamish.
By Wolf Richter for WOLF STREET.
Subprime doesn’t mean “low income.” It means “bad credit” – not paying bills, falling behind on debt payments, piling on too much debt, etc. That young dentist getting into it over his head is a classic example of high-income subprime: big house, expensive cars, student loans, etc., and then he falls behind.
The descent into subprime can be quick. The exit is slow: Getting current, paying down debt, paying everything on time, and gradually the credit score moves back up. Subprime for most people is temporary.
Subprime is only a small part of auto sales.
Of all $1.67 trillion in auto loans and leases outstanding, only about 14% were rated subprime and deep-subprime at the time of origination, according to Experian data.
But in terms of total auto sales, including cash deals – rather than just loans and leases – it’s even less.
Of all used vehicles sold in Q3 2025, only 35% were financed. Of that 35% with financing, 22% had subprime rated loans, according to Experian, which tracks this by liens on titles in the registrations data. In other words, of all used vehicle sold, including cash deals, only 7.7% were financed with subprime loans. It’s just a small part of auto sales.
Of all new vehicles sold in Q3 2025, 81% were leased or financed. Of these leases, fewer than 4% were subprime; and of these loans, 6% were subprime. It’s just a really small part of auto sales.
Subprime is largely handled by specialized dealer-lenders or specialized lenders.
It’s high risk, and high profit, with lots of ugly parts to it, and not for the squeamish. Subprime deals come with very high interest rates and very high prices on the vehicles. Dealers and lenders want to be compensated for taking the massive risks involved in lending to borrowers who have a history of stiffing their creditors, which is how they got to be subprime.
Subprime dealer-lenders routinely blow up, sometimes amid a mushroom cloud of fraud allegations, such as Tricolor last year. PE firms got into the subprime dealer-lender business, and some of those chains collapsed.
Publicly traded subprime dealer-lender chain America’s Car-Mart [CRMT] got hit, and we featured it here in December 2023 when it began confessing to its issues. At the time, the stock had tanked by 61% from its high in May 2021.
The stock has since then plunged further, and today is down by 88% from its peak, and is back where it had been over 25 years ago. It has been in our pantheon of Imploded Stocks for a while, and it shows the high-risk, high-profit nature of the subprime business (data via YCharts):
Subprime depends on securitization. Banks and non-bank lenders don’t carry subprime loans on their books; they’re way too risky. The specialized dealer-lenders and specialized lenders securitize the subprime auto loans into Asset-Backed Securities (ABS) and sell the slices to institutional investors around the world, such as bond funds and pension funds.
The lowest-rated slices of the ABS take the first losses, but also offer the highest yield. When things go wrong, they can get wiped out quickly. Their job is to protect the highest-rated slices of these bonds. So when losses occur, they’re spread across investors that got paid the most to take those losses. But even higher-rated slices have gotten hit.
Delinquency rate of subprime auto-loan ABS hit a new high.
The 60-day-plus delinquency rate of subprime auto loans that have been packaged into ABS rose to a record 6.9% in January, according to Fitch Ratings, which rates these ABS (yellow in the chart below).
The delinquency rate is very seasonal, and January is nearly always the high of the year. Compared to January 2024, the delinquency rate was up by 34 basis points (from 6.56%).
But “prime” auto loans are nearly always in pristine condition. The 60-plus-day delinquency rate of prime auto loans that were packaged into prime ABS tracked by Fitch remained at 0.4% in January, same as in December 2025, and same as in January 2018. Even during the Great Recession, the prime delinquency rate maxed out at only 0.9%. There was a bigger problem in the mid-1990s, when securitizing auto loans became a big thing and the nascent industry was climbing up a learning curve (blue in the chart).
The 60-plus-day delinquency rate for all auto loans and leases ticked up 1.61% in December, the latest data available from Equifax. The recent high had been 1.66% in January 2025.
During the Free-Money era of the pandemic, delinquency rates had dropped below 1%. But the monthly Equifax data that is available doesn’t go back further than the low point of the Free-Money era and therefore lacks the comparison to the pre-pandemic normal years (red in the chart below).
Total balances of auto loans and leases for new and used vehicles inched up by $15 billion year-over-year and for the quarter, to $1.67 trillion, after the dip in Q1 and the flat reading in Q3, according to the New York Fed’s report on consumer credit, based on Equifax data.
The reason auto loan balances surged by 23% in the five years of 2020-2024, despite lower vehicle sales, is that prices of new and used vehicles had spiked.
The burden of auto loans and leases — in terms of the debt-to-income ratio, a classic way of evaluating the burden of a debt — is lower than it had been before the pandemic because consumers’ disposable income has risen faster than the balance of auto loans and leases.
The auto-loan-to-disposable income ratio in Q4 was unchanged at 7.2%, the lowest since 2014, except for Q1 2021, when stimulus payments distorted disposable income into absurdity.
Disposable income, released by the Bureau of Economic Analysis, is the monthly after-tax income consumers have available to spend for their daily costs of living, to service their debts, and to save and invest the remainder. So after-tax wages, plus income from interest, dividends, rentals, farms, small businesses, transfer payments from the government such as Social Security, etc.
But it excludes income from capital gains, which is where the super-wealthy make most of their money. And this upper crust of income is excluded here and doesn’t skew the data.
In case you missed them: Here Come the HELOCs: Mortgages, Housing-Debt-to-Income-Ratio, Serious Delinquencies, and Foreclosures in Q4 2025
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Typhoid initially effected the poor neighborhoods in NYC, than Typhoid Mary, brought it uptown to the super rich. Credit problems will move up the ladder to the richest neighborhoods, as wealth collapses problems will be obvious. The storm is here.. great description above Wolf in explaining the sub prime auto issues. Typhoid Mary today is blind greed for more without regards to risk.