Auto loans and the subprime lending sector have been in the spotlight recently, with the collapse of several dealer-lender chains and the implosion of America's Car Mart. While subprime lending may not be for the faint of heart, it's only a small part of the auto finance landscape. The total balances of auto loans and leases outstanding for new and used vehicles rose by $15 billion in Q1 from Q4 and by $43 billion (+2.6%) year-over-year, to $1.68 trillion, according to the New York Fed's report on consumer credit, based on Equifax data. However, the auto loan balances have surged by 23% in the five years from 2020-2024, despite lower vehicle sales, driven by the price explosion of new and used vehicles in 2021 and 2022. This raises a deeper question: how bad is the situation really? Personally, I think the debt-to-income ratio is a key metric to evaluate credit risk. The auto-loan-to-disposable income ratio in Q1 dipped a hair to 7.17%, the lowest since 2014, except for Q1 2021, when various government payments distorted disposable income. What makes this particularly fascinating is that the subprime lending sector is only a small part of auto finance. Of all $1.68 trillion in auto loans and leases outstanding, only about 15% were rated subprime and deep-subprime at the time of origination (Experian data). This raises a deeper question: why is the subprime lending sector so unforgiving when these dealers-lenders take reckless risks? In my opinion, the answer lies in the fact that the subprime business is very unforgiving when these dealers-lenders take reckless risks – the results of which we’re now seeing. Last year, a couple of bigger companies involved in this business imploded, most spectacularly Tricolor amid a mushroom cloud of fraud allegations. PE firms got into the subprime dealer-lender business, and some of those chains collapsed. America’s Car Mart, the largest publicly traded subprime-specialized auto-dealer chain, also ran into severe problems, and has been in our pantheon of Imploded Stocks for a while. This raises a deeper question: what does the future hold for the auto finance sector? In my opinion, the future of the auto finance sector is uncertain. The subprime lending sector is under scrutiny, and the future of these dealer-lenders is uncertain. The auto loan balances have surged by 23% in the five years from 2020-2024, despite lower vehicle sales, driven by the price explosion of new and used vehicles in 2021 and 2022. This raises a deeper question: what does this mean for consumers and the economy? In my opinion, the auto finance sector is facing a challenging future, and the implications for consumers and the economy are uncertain. However, one thing that immediately stands out is that the auto finance sector is a complex and dynamic landscape, and the future of this sector is uncertain.
