Subprime auto lending experts combat bankruptcies and alleged fraud at failed auto dealerships – Jalopnik

We’re all a little concerned about the American economy these days, aren’t we? So the sudden collapse of a major used car dealer – Tricolor Holdings, specialized in customers with extremely poor or non-existent credit – has sparked a new round of concerns about so-called subprime auto lending. But that does not mean that the market is in serious trouble.

Here’s car news:

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 also reported “potentially systemic levels of fraud” at the company in early October. But participants at this month’s Auto Finance Summit suggested that while some concerns have been raised, Tricolor’s problems are not deterring investors who need auto lenders to buy up securitized packages of the loans they collect from dealers.

You may wonder: Is it really a good idea to get back into a subprime lending situation? I’m here to tell you that it’s not as bad as you might think. Although the economy is approaching a dump, we are not there yet and auto loans will not be the only element that will collapse the economy in the same way that subprime home loans did in 2008.

Just the word “subprime” can cause panic among otherwise reasonable people thanks to the 2008 financial crisis, when loans to buyers who had no real credit caused enormous problems because of the way those loans were packaged for investors. Auto loans are packaged similarly, but the key difference is that defaulting on a car loan leads to repossession, while defaulting on a mortgage leads to foreclosure. And it’s much easier to seize a car than it is to seize a house.

I’m oversimplifying, but the upshot is that the fall of an apparently sketchy and allegedly fraudulent dealer group that facilitated deep subprime lending is unlikely to pose a major risk to the overall system. That’s why Automotive News was able to gather many positive insights from experts in the field. For example: “Scot Hensel, chief financial officer at Kunes Auto Group [said] that he hasn’t seen any subprime lender tighten the deals they accept from Kunes. A fifth of the group’s financing sources are subprime.”

And this is because subprime and deep subprime borrowers have to pay very high interest rates, compared to borrowers with good or excellent credit, and when they are bundled into “asset-backed securities” (ABS)can offer investors returns that are well above the returns they would achieve with less risky options.

By 2025, a significant share of subprime borrowers will fall behind on payments – almost 6.5 percent, according to CNN. Major borrowers remain on notice, and analysts have probably rightly concluded that lower-income car owners are being hit on all fronts by stressful affordability challenges. Yet the The subprime market is quite small compared to the broader auto loan market, and it’s always worth remembering that subprime ABS investors get their fat returns for a reason: they’re the ones subsidizing the risk and allowing subprime lending to become a thing at all.

I have been covering this segment of the industry for years and – for years – have reliably seen panicky headlines emerge when subprime borrowers begin to endure more stress than usual. It is of course wise to keep an eye on the market. When all kinds of bad things happen in the economy, subprime bankruptcies can add to the argument for lowering interest rates so that borrowers can get some relief. Moreover, Tricolor became entangled in an opaque financial area, private credit (which a The professor at Yale Law School summed it up nicely in the New York Times). But it’s usually not a good idea to read the alarmist headlines and conclude that the sky is falling. Some investors will lose money. And that’s what they were prepared for when they took on the increased risk.