CDG Exclusive: Surprise from the subprime lending space
Including my latest insight into Ally Financial's auto lending practices
🔒 If you’re not a Premium Subscriber yet: Join 1,000+ others to get full access to this issue — and every issue.
Today's topic: Subprime lending + my insight into Ally Financial's auto lending practices.
Reading time: ⏱ about 2 min 39 sec
I made a very interesting observation this week. I’ll touch on that shortly, but first:
Let’s talk about subprime car loans.
More and more consumers are falling behind on auto loan payments – a direct result of soaring interest rates, soaring new and used car prices, and high inflation. For the lowest-income consumers, the rate of loan defaults is now exceeding that of 2019, according to data from Fitch. Loans taken by subprime borrowers in 2021 and 2022 are performing worse than the ones taken in previous years because people had to finance cars bought at high prices and then got squeezed by inflation.
Auto loan defaults rate has been rising steadily through 2022:

S&P/Experian
Now the average monthly payment is at the all-time high, plus insurance, gas, and repairs – all have recently shot up.
Car buyers that would have purchased a used car for $7,000 to $15,000 had to spend $20,000 to $25,000 for a similar unit. Unable to find suitable inventory to fill their lots, dealers that cater to subprime consumers, almost doubled the average listing price on their cars since the beginning of the pandemic, according to the CFPB.
Average monthly payment on a new car hit $777 in December.
An ALL-TIME record.
Is this what it feels like to hit the Jackpot? 🥴
— CarDealershipGuy (@GuyDealership)
Jan 19, 2023
I wrote in my previous newsletter that the trend will continue in 2023, especially if the economy will turn to recession. The Federal Reserve last week further increased the cost of borrowing, putting more pressure on those struggling to pay their loans.
The repossession industry echoes the message in their trade magazine – repo companies are having a hard time meeting the demand for labor and space to process and hold repossessed inventory. The number of repossession companies has recently shrunk by 30% as a result of many shops going out of business during the pandemic. Today lenders are competing to secure limited repossession business in anticipation of further increase in loan defaults.
Ally Financial, which has a significant share of loans to subprime borrowers, said in its October earnings report that it expects delinquencies to increase to as much as 3.8% compared with 3.1% in 2019. Not too bad, right? Well, there’s more…
Many lenders are in a rough spot. Responding to increasing risk, they have been tightening access to credit and pulling back on auto lending. At the same time, credit unions stepped in with aggressive rates and quickly gained market share. With declining origination, lenders are getting creative in boosting their volumes.
Previously, I wrote about some lenders dropping the existing auto loan stipulation. Recently, I was reviewing our lender roster and noticed an uptick in the business being sent to Ally Financial. Hmmmmm....
This caught me very off-guard. So I decided to dig in... Here’s what I discovered:
Subscribe to CarDealershipGuy Newsletter to read the rest.
Become a paying subscriber of CarDealershipGuy Newsletter to get access to this post and other subscriber-only content.
Already a paying subscriber? Sign In