Could Cracks in US Auto Loans Reveal an Overvalued Bull Market?

Could Cracks in US Auto Loans Reveal an Overvalued Bull Market?

As the headlines mount, I wonder if the emerging disorder in US subprime auto lending is becoming a bigger hole into which an overextended stock market could fall. With stock valuations hovering at historically high levels, even a hint of a macroeconomic or financial break could hasten a correction.

I don’t know if the problems are systemic, but it remains the case that stocks are expensive. We have had three very good years, and portfolio rebalancing is always sensible, especially when alternative funds offer diversification benefits without sacrificing returns.

Are bankruptcies, overdue files and warnings from regulators enough to really shake things up?

Here are the headlines:

1. Delinquencies on subprime auto loans are rising to record highs. The latest data from Fitch Ratings shows that 6.4 percent of subprime auto borrowers are now more than 60 days late on their car payments — an all-time high, surpassing the peaks of the 2008 financial crisis and the COVID-19 pandemic. The difference between subprime and prime borrowers is particularly stark, with the former’s default rate rising without interruption since 2020. While the development is unlikely to be contagious, the escalation reflects growing pressure on lower-income households, exacerbated by high car prices (over $50,000 on average), interest rates above 7 percent and rising insurance and repair costs.
2. Bankruptcy of PrimaLend Capital Partners. On October 22, 2025, Reuters reported that subprime lender PrimaLend Capital Partners had filed for Chapter 11 bankruptcy protection, listing assets and liabilities under $500 million. A major player in the buy-here-pay-her car finance market, PrimaLend’s collapse reinforces the idea that there is a need in another sector catering to borrowers with bad credit. The company’s CEO, Mark Jensen, says the bankruptcy aims to restructure rather than disrupt existing loans. However, this move reportedly follows months of unpaid creditors, as noted by Bloomberg, pointing to deeper liquidity problems.
3. High-profile warnings from market veteran, legendary short seller Jim Chanos, have identified “many red flags” at Carvana, a major online used car seller, amid the auto loan crisis. Shares of Carvana plunged 13 percent on Oct. 22 after Chanos’ comments. Similarly, when Jamie Dimon, CEO of JPMorgan Chase, recently warned that “the credit cycle has changed” and “the lowest rungs almost always lead,” one cannot help but think of the global financial crisis (GFC), when the need for subprime led to a broader credit tightening.
4. Regulatory alarm bells Bank of England Governor Andrew Bailey has drawn parallels with the 2008 financial crisis, citing the resurgence of ‘cutting up’ complex lending structures in private credit markets. The collapse of US companies, First Brands and Tricolor, has been described as ‘canaries in the coal mine’. I don’t know if the problems are systemic, but it remains the case that stocks are expensive. We have had three very good years, and rebalancing portfolios is always sensible, especially when alternative asset classes offer diversification benefits without sacrificing returns. Meanwhile, BoE Deputy Governor Sarah Breeden highlighted concerns about high debt levels, opacity and weak underwriting standards – factors that could amplify any contagion.
5. Anecdotal Evidence of Reckless Borrowing Social media is full of nonsense, but one post from @CollinRugg about two illegal immigrants in Phoenix who owe $420,000 with no intention of repayment highlights a disturbing trend of unsustainable debt. These individuals earn only $6,000 per month and avoid taxes. They reflect how lax credit standards could have fueled a bubble.

Are these cracks in the bull market?

The bull market, supported by the artificial intelligence (AI) theme, fairly robust corporate earnings growth and accommodative liquidity, has pushed stock valuations to levels that appear overextended. For example, Shiller’s price-to-earnings ratio (P/E) is currently hovering near historic highs, as is its market capitalization to gross value added (GVA). Both point to distortion and fuel the idea that any macroeconomic shock or earnings disappointment could lead to a sell-off.

What if, for example, a subprime auto loan crisis acts as a catalyst?

With more than $1.66 trillion in outstanding auto debt, auto loans are the largest category of consumer debt after mortgages. Increasing delinquencies can affect both consumer confidence and purchasing power. Even if it only made a difference of 0.5 percent of GDP, it would not be trivial, especially when combined with inflation. Stagflation anyone?

In addition, the concentration of consumer credit at just four major U.S. banks increases risk. A sufficient number of seized vehicles and bad debts could potentially strain balance sheets if subprime lenders like PrimaLend are indicative of a broader trend.

Meanwhile, the return of complex loan securitization reflects the pre-2008 practices that exacerbated the subprime mortgage crisis. I’m not suggesting this is the GFC 2.0, but when market valuations are too high, investors only have to worry about such a scenario before markets fall sharply. And if auto loan defaults lead to losses on asset-backed securities (ABS), investors in these instruments – often institutional players – could face significant writedowns, which could lead to a sell-off.

Look, the bottom line is that the market has done a great job of climbing a wall of worry. That’s what bull markets do. But after three years of brilliant stock returns, and with an unpredictable administration in the White House, why wouldn’t investors consider rebalancing by rotating profits into sectors less sensitive to consumer credit, such as utilities and healthcare (which have outperformed in the past month), by replenishing cash reserves to take advantage of potential dips, or by rebalancing towards more defensive asset classes, such as successful and carefully selected Australian private credit funds or arbitrage? funds.

The bull market has been resilient, but these subprime auto loans are a tangible crack. Whether this develops into a full correction depends on contagion and policy responses. For now, these gaps are a warning sign that offers investors an opportunity to rethink their portfolio asset weightings.

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Roger Montgomery is the founder and chairman of Montgomery Investment Management. Roger has more than three decades of experience in fund management and related activities, including equity analysis, equity and derivatives strategy, trading and securities brokerage. Before founding Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also the author of the best-selling investing guide to the stock market, Value.able – how to value and buy the best stocks for less than they are worth.

Roger regularly appears on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.

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