Banks Grow Auto Credit Exposure as Subprime Risks Mount

Lenders are rapidly expanding auto credit — even as subprime delinquency rates remain elevated and comparable to delinquency rates in past recessions.

In doing so, lenders now find themselves facing difficult questions. Is this a responsible way for lenders to respond to a borrower’s need to increase their affordability, or has it become a precursor to another round of subprime lending due to volume rather than performance?

In 2025, banks surpassed captive finance companies as the largest lenders for auto loans. Banks now account for roughly 28% of total auto financing. Despite worsening affordability and rising costs for consumers, many lenders continue to grow and do not seem willing to retreat.

For subprime lenders, this change is important. Competition for paper is intensifying as borrower stress grows. The risk is not simply higher delinquencies. It is the possibility that margins compress at the same time losses become harder to predict.

Banks Push Credit Expansion Into a Tougher Environment

Large lenders are extending loan terms, and they are tolerating higher payment pressure on borrowers.

“Every bank I talk with is in a growth mode,” said Melinda Zabritski, Head of Automotive Financial Insights at Experian. “They’re buying a little deeper, they’re buying a little older, they’re moving into longer terms.”

The average monthly payment on a new vehicle is now just shy of $800. Used vehicle payments exceed $500. The average amount financed on a new vehicle has increased to more than $44,000.

Auto insurance costs have increased by about 12.7% annually over the past five years. The added burden of rising insurance premiums adds pressure to already strained budgets. This limits how much wiggle room most consumers can afford when it comes to making their loan payments.

Executives at lending companies say they are not recklessly trying to grow their business to increase profits by financing more vehicles. They claim that current underwriting is intentional and that losses will occur. Lenders model delinquency rates into their financial projections.

“No one is surprised by the levels of delinquency we have right now,” Zabritski said. “Whereas in 2009, it just kind of came out of the blue. People weren’t planning for it. We’re planning for it now.”

Lender confidence is being tested by performance trends. “We are a little bit concerned about where delinquencies and write offs are going,” said Moody’s Economist Mike Brisson.

Subprime delinquencies remain elevated. Some delinquency measures place them on par with prior recessionary periods. This does not automatically translate into charge-offs. But it does increase sensitivity to any additional economic stress.

Planned Losses Versus Real-World Volatility

Creditors can distinguish between anticipated and unanticipated loss. Anticipated loss is acceptable when it reflects both the pricing and structuring of a loan.

In practice, this balance can break down. Payment stress limits borrowers’ ability to adapt. As financed amounts increase and/or terms stretch, it takes borrowers longer to obtain positive equity in their vehicles.

If used vehicle prices decrease, then more loans may remain underwater for longer. This relationship can increase loss severity even if delinquency rates do not increase.

Older collateral can negatively affect recovery efforts. In addition, when many risk factors simultaneously affect the same credit pool, correlation tends to increase, and what appears to be a manageable isolated loss can spiral.

That’s why the key strategic decision facing subprime creditors is determining which risks are reflected in their yields. As banks move lending further downstream, competition among them increases.

As market volatility rises, competition adds downward pressure on pricing. The threat is not necessarily the creditor making poor-quality loans, but rather making loans based on iffy assumptions.

Discipline is important. Creditors who implement tighter loan structures and verifications may lose some volume, while those that seek to chase volume may make loans based on static forecasts.

The EV Wild Card in Subprime Collateral

One way lenders may be able to offset their exposure to possible negative trends in electric vehicle demand is through supply.

Forecasts call for a significant wave of off-lease used electric vehicles returning to the market over the next few years, with peak levels predicted for 2027 and 2028. In theory, this would provide consumers with greater access to newer, lower-priced electric vehicles.

This has positive implications for subprime consumers. But this creates several questions for lenders.

EV depreciation is still highly speculative due to the impact of battery performance, technological advancements, and how much demand there will be for used electric vehicles. The faster electric vehicle prices decline, the faster losses will build up for lenders — even with newer model years.

As a result of these variables, lenders have two strategic options when dealing with used electric vehicles.

If electric vehicles depreciate at the rate all other vehicles do, then they will likely provide better collateral for subprime lending. On the other hand, if electric vehicles quickly lose value, they will create another layer of loss as well as compound stress.

Bottom Line

The current market is much different than the one in 2007. Lenders have a better understanding of the risks they are taking on today and know they could take losses. Today, we see credit growth clashing with continued affordability pressure and rising delinquency rates.

Pricing discipline and structural restraint will be foremost for subprime lenders to succeed going forward. To merely produce volume will no longer be sufficient. The next phase of the auto cycle will reward lenders who not only anticipate greater losses but also plan when models fail to behave as expected.