We’re all just a little worried about the U.S. economy these days, aren’t we? So naturally, the sudden collapse of a big used car dealer – Tricolor Holdings, which specialized in customers with extremely not-so-good or nonexistent credit – has set off a renewed round of fretting about the so-called subprime auto loan business. But that doesn’t mean the market is in any serious trouble, yet.
Tricolor, which focused on sales and lending to customers with limited or no credit history, not only filed for bankruptcy in September, but its trustee in early October reported “potentially systemic levels of fraud” at the company. But participants at the Auto Finance Summit this month suggested that while some concern has arisen, Tricolor’s issues aren’t scaring off the investors that auto lenders need to buy up securitized packages of the loans they’ve collected from dealerships.
You might ask yourself: Is it really a good idea to get back into a subprime loan situation? I’m here to tell you, it’s not as bad as you might think. While the economy is approaching shambles, we’re not there yet and auto loans won’t be the single element that brings it down in the same way that subprime home loans did in 2008.
Cars vs. houses
The very word “subprime” can set off panic on otherwise reasonable folks thanks to the 2008 financial crisis, where loans to buyers who didn’t have sterling credit caused massive problems due to how those loans were packaged for investors. Auto loans are similarly packaged, but the key difference is that a default on an auto loan leads to a repossession, while a default on a mortgage leads to a foreclosure. And it is much easier to repossess a car than it is to foreclose on a house.
I’m oversimplifying, but the upshot is that the fall of one evidently rather sketchy, and allegedly fraudulent, dealer group that facilitated deep subprime loans isn’t likely to carry a major risk to the overall system. That’s why Automotive News was able to gather plenty of upbeat insight from experts in the field. For example: “Scot Hensel, finance director at Kunes Auto Group [said] that he hadn’t seen any subprime lenders tightening up on the deals they’ll accept from Kunes. One-fifth of the group’s finance originations are subprime.”
And this is because subprime and deep subprime borrowers are charged very high interest rates, relative to borrowers with good or excellent credit, and when bundled in “asset-backed securities” (ABS), can provide investors with returns well above what they’d get with less risky options.
Stress vs. panic
In 2025, a notable portion of subprime borrowers are falling behind on payments – almost 6.5 percent, according to CNN. Prime borrowers are keeping up, and analysts have probably rightly concluded that lower-incomer car owners are being hit on all fronts by stressful affordability challenges. Still, the subprime market is quite small when compared to the broader auto-lending space, and it’s always worth remembering that investors in subprime ABS are getting their fat return for a reason: they’re the ones subsidizing the risk and making it possible for subprime lending to be a thing in the first place.
I’ve covered this segment of the industry for years and – for years – have seen reliably panicky headlines arrive in force whenever subprime borrowers start to endure more stress than usual. It’s a good idea to keep an eye on the market, of course. If all kinds of bad stuff is happening in the economy, then subprime defaults can add to the argument for cutting interest rates so that borrowers can get some relief. Additionally, Tricolor was enmeshed in an opaque area of finance, private credit (which a Yale Law School professor has nicely summarized in the New York Times). But it’s usually not a great idea to read the alarmist headlines and conclude that the sky is falling. Some investors will lose money. And they were prepared for that when they took on the elevated risk.
