A Big Auto Lender Went Bankrupt: What It Means for You
Tricolor, a major subprime auto lender specializing in loans to buyers without traditional credit histories, has filed for bankruptcy and plans to liquidate. This event raises questions about the stability of the subprime auto loan market and its potential impact on borrowers and investors. While it's not expected to trigger a financial crisis similar to the 2008 subprime mortgage crisis, it could lead to tighter lending standards.
Tricolor's Bankruptcy: Key Details
Tricolor Holdings, which also operates a chain of used car dealerships under the names Tricolor Auto, Ganas, and Ganas Ye, focused on issuing loans to low-credit and no-credit buyers, often without requiring a credit check. The company's bankruptcy filing didn't specify a reason, but it follows reports of a U.S. Justice Department investigation into fraud allegations. This liquidation comes shortly after another subprime lender, Automotive Credit Corp, paused all originations.
- Tricolor specialized in subprime auto loans, often to undocumented immigrants.
- The company filed for bankruptcy on Wednesday and plans to liquidate.
- The move follows reports of potential fraud investigations.
Why This Isn't a Repeat of the 2008 Crisis
Despite the failure of a major subprime lender, experts believe this situation is unlikely to trigger a broader financial crisis. Pamela Foohey, a law professor at the University of Georgia, emphasizes key differences between subprime auto loans and the subprime mortgage loans that led to the 2008 recession. The auto loan market is significantly smaller, and auto loans are not as heavily leveraged or bundled into complex securities.
Crucially, unlike home values in 2007 and 2008, car values are generally holding steady or rising, and are naturally depreciating assets. As Foohey states, "The biggest difference is the expectations of the lenders of what will happen with the assets – the cars – when the buyers default." Subprime auto lenders often anticipate defaults and plan to repossess and resell the vehicles.
The State of the Auto Loan Market
While not as massive as the mortgage market, the car loan market is still substantial, with total balances at $1.7 trillion as of June, according to the Federal Reserve. Subprime auto loans represent a smaller segment, accounting for roughly 15-16% of the overall market in the past three years. However, rising car prices and high interest rates have led to record-high car payments, impacting both subprime and prime borrowers.
- Total car loan balances are $1.7 trillion.
- Subprime loans make up 15-16% of the market.
- Over 15% of new car payments exceed $1,000 per month.
Potential Ripple Effects and Tighter Lending Standards
Tricolor's bankruptcy could still have ripple effects. Larger banks, including JPMorgan Chase, Fifth Third Bancorp, and Barclays Plc, provided financing to Tricolor. These banks may face losses related to Tricolor's collapse. Fifth Third has already reported potential losses of up to $200 million related to fraud discovered in its relationship with a commercial borrower, which they later confirmed was Tricolor. While these losses are likely manageable for these institutions, they could lead to increased risk aversion and tighter lending standards across the board, potentially making it harder for consumers to obtain auto loans.
