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, including components of recklessness by the specialized industry and by borrowers, and is 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.
I don’t see how only 35% of used vehicles are financed
today a 10 year old vehicle with 100,000(say toyota) is fetching upwards of $25,000++
65% of used vehicle buyers have that much cash??
or is it access to say HELOC
1. 10-year-old Toyota Camrys with 100k miles run between $9,000-$14,000, including at overpriced CarMax in SF Bay Area — not $25,000+ I also see a Camry for $6,000 with 200k miles. And US brands are cheaper, for example, Ford Fusion SE, 2016, 78K miles $7,000. Toyota has only a small slice of total used vehicle sales.
2. You belong to the people that think that most Americans are struggling or poor, which is ignorant bullshit, and that only poor people buy used vehicles, which is ignorant bullshit.
3. You should read some of the articles here about the many trillions of dollars in interest-earning cash that households are sitting on, in addition to their 401ks and other stock and bond holdings.
4. Lots of people pay cash for their used vehicles, including us. Many more people are doing it now since used-vehicle interest rates are relatively high, so it makes lots of sense to pay cash. And the percentage of cash buyers has risen over the past four years for that reason.
5. Like many people, we buy 2-3-year-old used vehicles because financially, they’re a much better deal than a new vehicle. The value of a new vehicle drops by many thousands of dollars the moment you buy it, when it becomes a used vehicle. That doesn’t happen with vehicles that are already used.
6. It’s stupid to use a HELOC to buy a car (the home is the collateral, and you can lose the home over it), rather than financing the vehicle (the vehicle is the collateral, and you can lose the vehicle). In addition, HELOC interest rates are about the same as the interest rate on 60-month used-vehicle loans. Rates vary for both depending on lots of factors, including credit rating.
The guy asked a civil question and got an uncivil answer.
No, he didn’t ask “a civil question.” Read his comment!!!! He made a statement, “I don’t see how only 35% of used vehicles are financed.” This statement called the registrations data I cited a liar because the registrations data didn’t fit his silly narrative. This registrations data reflect liens recorded on the titles issued to the buyers after the sale. I explained that in the article.
What? Do you get poor or adopt bad financial habits if you shakes hands (the horror) with someone that is?
Subprime isn’t always greed. Sometime life doesn’t always work the way you planned and some don’t have big safety nets. “Live within your means”….you can do that and still default on debt.
The small percentages show blind greed is not at play.
As for Typhoid i think the Fed has come up with a cure for the rich. But who knows for sure
Pam Bondi used the Dow at 50k as a justification to protect the rich and powerful men who victimized our country’s teenage daughters for their pleasure with impunity. So mad!!! Maybe 2 handle on the Dow will allow justice! To be served! Will see what the PCE brings the Fed this week.
What were the excuses before Bondi?
I’d make a lousy American. I’ve had only one “auto loan” in my life and I am now old as Methuselah. Come to that I’ve bought only one new car in my life.
I did buy a brand-new motorbike once but I used the money I’d earned from jobs in the summer holidays from secondary school; casual labour around the harbour – it’s handy being big and strong for your age.
Methuselah,
I agree with you ( and I may be as old). We generally buy a new car every 10-15 years. 15, if it has been reliable. We also sign up for the extended warranties and they have been worth it. Ie, my 2012 Jeep has a lifetime drivetrain warranty offered at the time and I’ve made my money back 3-4X. We generally save up over the 10-15 years and pay cash for the car.
However, car loans offered by dealers for new cars can make the decision financially more complex.
For example, GM offered the following on new cars last year:
1) 0% 60 month loan. No rebates
2) Pay cash. No rebates
3) 7% 48 month loan with a $1200 rebate and no prepayment penalty.
If I had to make the choice, I’d pick 1 and continue to TBill and chill making almost 4% on the cash for now. This would show up as an increase in Wolf’s excellent charts above on loan balances.
My second choice would be #3 and take the $1200 rebate and pay off the loan ASAP with no prepayment penalty.
The worst financial choice would be to pay cash out of my TBill accounts and not collect the TBill interest Or the $1200 rebate.
The payment method is done after you’ve negotiated the price so there isn’t any room to negotiate the deal by offering cash. The dealers don’t care and I think they get more of a corporate kickback if they sign you up for a loan.
I think it is more complex than a home mortgage.
Mainstream media headlines describe the subprime and delinquent auto loans with far more Doom than your simple numbers do.
Doom porn is far more exciting I suppose.
It is amusing, and perplexes me as to why so many people that are so well off, fixate on doom and gloom, and complain so much.
The morons in the media constantly conflate “subprime” with low income because that makes better clickbait. But subprime is just a credit rating, it means “bad credit,” it means a history of not paying their financial obligations.
7% delinquent of 14% of the loans is only 1% of the total impacted. Still extremely minimal but may be an early indicator.
I’m here for the doomers that skipped the opening paragraph.
thanks you made me laugh :) I needed that.
I was actually referring to the private jet crowd who brag about their balance sheet of 8 homes who will be liquidating their Lambo and homes before this is done.
Doomer are like a broken clock with enough time they will be right! :)
Cheers!
Great info like always. Thanks Wolf. Best site on the web.
Wolf, there has been talk of legislation to cap interest rates on credit cards at 10%. A telling adjective you see in the legislation language is that high interest rates are “predatory”. Is this merely lip service to the pursuit of affordability when there is a clear (albeit risky, to your point) market for subprime loans? While these subprime loan rates look predatory, they also seem to be well justified based on the credit history of the borrower. Is it merely political optics when one source of high rates (credit cards) is targeted but another source (subprime loans) is not? Or am I missing something obvious? Thanks, as always!
If you think it’s anything other than optics ask yourself how they came up with 10%. Why not 8%, or 12%?
And by optics I mean politicians know it’ll never be enacted into law so they can say whatever they want and get credit for trying.
If they cap rates at 10% (they won’t), NO ONE will lend to higher-risk borrowers. People may have to have a credit score of 660 or higher to qualify for an auto loan (secured), and maybe 700 or higher to qualify for a credit card (unsecured).
Higher risk borrowers pay higher interest rates. That’s just how it is. Lots of companies are junk-rated, and they can still borrow, but they pay higher interest rates.
When the risk of default is substantial, lenders want to be compensated for taking those risks. If they’re not compensated for it, they won’t lend, and borrowers with lower credit scores will not be able to get any loans or credit cards at all.
If they cap interest rates at 21%, for example (like the old usury caps), it would only block the riskiest borrowers. So the impact would be small, but there would still be an impact.
Wolf, I hadn’t considered the security (secured versus unsecured) of the loans. Appreciate the insight!