Major banks, facing a slowdown in mortgage originations, are redirecting their focus to the auto loan market. This strategic shift leads to increased credit availability and easier underwriting standards for car buyers as banks seek alternative revenue streams.

Despite rising Treasury yields, auto loan rates have remained stable or even fallen. This is because the previously wide spreads—the difference between Treasury yields and auto loan rates—have significantly narrowed, absorbing the impact of the rising base rates for consumers.

Rising gasoline prices are driving significant consumer demand for used EVs. This trend helps absorb the growing supply of off-lease EVs entering the market, supporting overall used vehicle values and preventing a market glut.

Recent stress in credit card and auto loan markets is concentrated in loans originated in 2021-2023 when stimulus and looser standards prevailed. Lenders have since tightened, and newer loan portfolios are performing better, suggesting the problem is not spreading systemically.

Over 15 years, auto loans transformed from the best-performing loan product to the riskiest. This shift is driven by a "double whammy" of soaring vehicle prices—which outpaced even mortgage growth—and rising interest rates, compounded by overlooked costs like insurance and repairs.

A critical insight for secondary buyers is that most credit risk is front-loaded. Data shows that two-thirds of all defaults occur within the first three years of a loan's life. This means that by purchasing seasoned assets in the secondary market, investors can bypass the period of highest risk and gain greater visibility into a portfolio's long-term health.

Rising delinquencies in subprime auto are not a sign of a uniformly weak consumer. The underperformance is largely confined to loans originated from 2022-2024, which were impacted by a unique combination of inflated used car prices and sharply higher interest rates, leading to strategic defaults.

Unlike Carvana, which derives half its gross profit from subprime auto loans, AUTO1 operates in a safer credit environment. The European auto finance market is only 2-3% subprime, compared to 15-20% in the US. This regulatory and cultural difference makes its lending arm inherently lower-risk.

An alternative data point from Equifax reveals significant economic stress. The delinquency rate for subprime auto loans (borrowers with scores below 660) has reached 10%, a level higher than that observed during the 2008-2009 global financial crisis, signaling trouble for lower-income households.