A major subprime auto lender suddenly collapsed — raising concerns about the industry. How it could impact borrowers

Subprime auto loans — loans for borrowers with bad credit or no credit history to help them buy a car — are big business in the U.S. According to Kelley Blue Book, citing Cox Automotive data, subprime loans accounted for 13.6% of auto loans issued in August. (1) Bloomberg estimates the subprime auto market to be worth $80 billion to investors. (2)

So, when a major subprime lender unexpectedly goes under, it can have ripple effects across the industry.

Texas-based Tricolor Holdings filed for Chapter 7 bankruptcy on Sept. 10. and intends to liquidate. The move comes on the heels of reports of fraud allegations linked to the company. (3)

The sudden shuttering of Tricolor could result in sizable losses for big banks — which reportedly include JPMorgan, Fifth Third and Barclays — that provided financing to the business. It may also serve as a signal the industry is under serious strain.

But what does this mean for borrowers? Fewer lenders on the market may impact your ability to get a car loan going forward, as a shaky outlook in the subprime auto loan industry could have longer term impacts for borrowers without good credit.

As previously mentioned, subprime lenders specialize in offering loans to borrowers with poor credit history. Often, these folks have nowhere else to turn for a loan. Bloomberg reports that Tricolor was known for lending to low-income Hispanic communities, and the company estimated many of its borrowers were undocumented immigrants.

Subprime auto loan options can be appealing to people who otherwise can’t get a loan but need a car to commute to work or drive their kids to school. In such cases, it’s a lifeline.

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But subprime borrowing can come with serious drawbacks, including sky-high interest rates, hefty fees and strict policies. Penalties can quickly add up if you fall behind on payments.

A surge in delinquencies recently has forced several subprime lenders into bankruptcy, per Bloomberg. Last year, reports also indicated massive increases in car repossessions. Bad omens for consumers.

Borrowing from a subprime lender is risky, especially as car prices remain elevated. If you have to work with a subprime lender, do your research ahead of time, including reading reviews from other customers. This can help to ensure you don’t get taken for a ride.

When you apply for the loan, ensure you get all the details in writing before signing, and that you understand the full charges, including any penalties for missed payments. Make sure you’re agreeing to a deal you can afford.

Before you sign on the dotted line, however, you may want to consider other loan options. This can include borrowing from friends or family who may be able to offer more friendly terms. Another option would be to ask someone you know with good credit to cosign a loan with you. Doing so might give you access to a traditional loan with a better interest rate. But beware — a cosigner is also responsible for the loan, which means if you miss a payment you could hurt them financially.

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Kelley Blue Book (1); Bloomberg (2, 3)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.