Writer: Eric Bank
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
- Auto delinquencies hit a 15-year high, signaling further borrower distress.
- Lower credit scores and expiring pandemic-era student loan relief are distorting risk assessments.
- Subprime lenders face increased losses and new problems in sources of funding like asset-backed securities, namely rising default risk, investor pull-back, and tighter liquidity.
Delinquencies are rising in the one bill Americans try hardest not to miss: their car payment.
According to LendingTree, 5.1% of Americans are behind on their auto loans — the highest rate in 15 years. That includes 2% who are at least 30 days late and close to 1% who are over 90 days past due. The strain is even greater among subprime borrowers.
Fitch Ratings reveals 6.6% of subprime auto debtors were 60 or more days in arrears in January 2025 — a record for the past decade. Over the past year, 30-day-plus delinquencies have risen 40% among consumers with the lowest credit scores, according to Experian.
Missed auto payments aren’t random — they’re a warning sign. And subprime lenders often feel the impact first.
But the strain isn’t limited to high-risk borrowers. Pressure is mounting across the credit spectrum. Even well-qualified borrowers are falling behind, squeezed by rising lease costs and falling used car values — now down 10–15% from 2022 prices.
Now, with loan balances outpacing car values, hundreds of thousands of borrowers owe far more than their vehicles are worth.
These Car Payments Are No Ordinary Miss
Auto loans usually get paid first — most people would rather miss a credit card or utility bill than risk losing their car. So when delinquencies rise here, it’s a serious warning sign.
And it’s not just subprime borrowers falling behind. Even prime borrowers are sliding, a sign of broad financial strain. But in the subprime market, where risk is harder to absorb, growing defaults are a flashing red light. When this segment stutters, turbulent times are likely near.
Meanwhile, credit remains tight, especially for subprime borrowers. Even those trying to stay current are often denied approval. Borrowers with low credit scores can’t refinance or trade in — keeping them stuck with payments they can’t afford.
Student Loan Data Complicates the Risk Picture
Resumption of student loan payments has mixed up credit signals. According to FICO VP Shams Blanc, 2 million auto-loan borrowers had student loan delinquencies reported in their credit histories in Q1 2025. One in 5 had a 100 or more point drop in FICO score.
Nearly 30% of the 18-to-29-year-old demographic experienced that same drop. That means thousands of borrowers who are current on their car loans are still labeled subprime — simply because their student loans are being reported.
According to Blanc, “Today’s subprime isn’t what it used to be.” Roughly 1 in 10 student loan borrowers with auto loans were pushed into subprime status by that single change in reporting.
Student loan reporting has complicated the subprime auto portrait, increasing the pool of borrowers and unpredictability.
That skews the perception. It may appear that subprime auto delinquencies are declining, but in fact, the borrower pool has grown. Lenders now face greater uncertainty, with more borrowers at risk of default.
Some lenders are shifting toward near-prime borrowers to avoid that complexity, seeking more stable returns and tighter risk spreads. But this move leaves more of the subprime market underserved, further eroding access and affordability.
ABS Vulnerability and Market Dislocation
Subprime lenders rely heavily on asset-backed securities (ABS) to fund their loans. But as defaults rise, investor confidence in those loan pools can erode — leading to credit rating downgrades, surging risk premiums, or even a shutdown of funding altogether.
Forbes observes that ABS spreads are still tight despite weakening underlying credit. Lenders, such as Ally and Santander, see increasing delinquencies but haven’t established corresponding reserves. If the market corrects, liquidity could dry up just as funding costs peak.
The problem primarily affects non-bank and regional lenders, whose survival depends on access to asset-backed securities. Without it, they’ll be unable to issue new loans or refinance existing ones.
To keep pace, lenders may need new partnerships — especially with repo and collections technology. Smart recovery systems — such as predictive analytics, GPS-enabled repo tech, and automated borrower outreach — can reduce charge-offs while preserving liquidity, even during default surges.
What Subprime Lenders Should Do Now
Traditional scorecards no longer capture the full picture. Subprime lenders need more precise tools to assess risk and respond quickly.
Key steps to consider include:
- Distinguish borrowers affected by student loan-related score drops from those showing distress across multiple credit lines.
- Notice behavior early. A payment that has been missed is a flare, not a flicker. Be alert.
- Stress test vigorously using a model of households’ unemployment, inflation, and payment priorities.
- Reshape ABS structures. It would require shorter loan pools and fortified credit enhancements.
- Invest in recovery. Tech-enabled repo and smart servicing are no longer optional — they’re survival tools.
Skipping the car payment isn’t background music — it’s the lead guitar. Lenders that hear the signal now can still prosper. Those that wait for the data to confirm it? They will be left with a hollow loan book when the music stops.
