Used Car Boom and High Delinquencies Signal Trouble in Auto Finance

The U.S. auto market is feeling the strain from tariffs, high costs, and slow EV sales. GM, Ford, and Tesla are having the worst of it. Subprime lenders are feeling the stress as well. Ford CEO Jim Farley spoke of “a lot of cost and a lot of chaos.”

Experts expect demand to soften. Consumers may be losing their appetite for buying — the culprits include inflation and slow income growth.

Financial stability suffered from the bankruptcies of First Brands Group and Tricolor. JPMorgan Chase CEO Jamie Dimon called the collapses “early signs” of excess in corporate lending. Unsurprisingly, automakers are finding it more difficult to shave costs.

We aren’t in a crisis just yet. For example, Barclays raised its sector outlook from negative to neutral. Nonetheless, suppliers must contend with trade tensions and inflation. In fact, some small parts makers have gone under and others are experiencing a cash crunch.

Ford CEO Jim Farley recently spoke of “a lot of cost and a lot of chaos” in the auto industry.

Another worry is the cooling EV market. GM had to absorb a $1.6 billion loss from its EV cutbacks. Tesla and Ford are reducing spending. Things will get worse if tariffs increase further.

Shifting Demand Toward Used Cars and Subprime Lending

New-car sticker shock is boosting demand for used vehicles. High interest rates and insurance costs are damaging affordability. But that’s good news for Buy Here Pay Here dealers and subprime lenders.

Higher-income households — which represent about two-thirds of new car buyers — are still gobbling up expensive models. One favorite is the $65,000 Ford pickup. This segment enjoys stable jobs and rising home values.

But middle- and low-income consumers (i.e., below the $83,730 median) face tighter budgets. Many rely on credit cards or subprime loans.

In other words, the gaps between the haves and have-nots are widening.

Fitch Ratings says 6.43% of subprime auto loans were over 60 days delinquent in August, near record highs. This creates demand for easier financing and tools to build credit. Dealers offering good payment plans and extended warranties should benefit.

CarMax and other large used-car retailers say lower-income buyers are under the most stress. Higher interest rates make it harder to get loan approvals, moving more people into subprime loans.

Repossessions are also rising. Some lenders modify loans to avoid repos — a temporary fix. At the same time, synthetic ID fraud and credit washing are on the rise. This motivates dealers to use new ID scanning and verification tools.

What It Means for Subprime Lenders

Subprime lenders may pounce on the current conditions. As new car prices climb, lenders that keep terms fair can grow. Subprime lenders may assess risk using artificial intelligence and alternative data, including rent, utilities, and employment.

These tools help lenders identify stable subprime borrowers with strong cash flows. Lenders want to build loyalty as they help customers improve their credit.

Bottom Line

People can rebuild their credit via secured auto loans as well as flexible payment systems. At the same time, subprime lenders can grow their business by offering cheap credit. The move toward used car sales and better loan options should guide future auto finance.