When the housing market collapsed in 2008, subprime lending was widely blamed for the crisis. Former Federal Reserve Chief Ben Bernanke explained at the time that as home prices fell and credit became less available, borrowers could not refinance and were left with unaffordable adjustable-rate mortgages. “Many of these borrowers found it difficult to make payments at even the introductory rate, much less at the higher post-adjustment rate. The result, as I have already noted, has been rising delinquencies and foreclosures, which will have adverse effects for communities and the broader economy as well as for the borrowers themselves,” he said.
Now, similar challenges are affecting subprime auto loans following Tricolor Holdings’ filing for Chapter 7 bankruptcy in September. Tricolor Holdings, a company focused on serving Hispanic and immigrant borrowers, filed for liquidation with more than $1 billion in liabilities after its business model was impacted by rising delinquencies and tighter funding conditions. According to The Daily Overview reported on Newsbreak: “Tricolor Holdings, a major player focused on Hispanic and immigrant borrowers, filed for liquidation with more than $1 billion in liabilities after its own business model buckled under rising delinquencies and tighter funding conditions.” The report added that this failure signals increased fragility among high-risk lenders due to expensive capital.
Subprime auto loans are often one of the few options available to people with limited credit histories. Most Americans outside major cities depend on cars for work and daily needs. According to Investopedia, while subprime loans carry higher rates and fees, they are frequently the only option for those without strong credit backgrounds.
The Federal Reserve Bank of Chicago notes: “Since homeownership and college attendance rates are lower for people in these households, an auto loan is often the largest loan an LMI household will ever take out and may be its primary connection to financial markets.” The Federal Reserve also states: “Cars are an important source of wealth and provide substantial economic benefits while also being the largest source of debt for low and moderate-income (LMI) households.”
Experian’s State of the Automotive Finance Market report indicates that subprime loans made up 16.7% of all auto loans during Q2 2024. Additionally, CNN reported in October that “the percentage of subprime borrowers – those with credit scores below 670 – who are at least 60 days late on their car loans has doubled since 2021 to 6.43%, according to Fitch Ratings,” surpassing levels seen during previous recessions.
Tricolor’s bankruptcy has raised concerns about access to auto financing for low-income consumers. Financial Times described Tricolor as a “fast-growing lender” that quadrupled in size recently by focusing on low-income Latino immigrants and others with limited credit histories.
U.S. Attorney Jay Clayton told Click 2 Houston: “Of course, if you have something like this happen, if you have fraud in that area, it becomes harder for those people to get auto loans.”
Following Tricolor’s collapse, some existing customers risk having their loans transferred to companies that may strictly enforce repayment terms or repossess vehicles.
The Reynolds Center for Business Journalism reported that banks are tightening lending standards for car buyers with subprime credit scores based on data from the Senior Loan Officer Opinion Survey conducted by the Federal Reserve. This includes raising minimum down-payments required to qualify for a loan.
“Tighter credit can mean losing the very tool that makes work possible. When lenders pull back, the ripple effects land hardest on people who rely on their vehicles to earn a living,” stated Reynolds Center.
This development comes amid other lender failures in recent months.
