A decade of growth, now facing headwinds
Over the last decade, the auto lending market saw strong expansion. Loan balances rose steadily as vehicles became more expensive, and financing terms grew more flexible. The average loan size for both new and used vehicles climbed sharply, a trend accelerated by the supply chain shortages and vehicle price inflation during the COVID-19 pandemic. Over the five-year span from 2019 Q4 to 2024 Q4, the average amount financed for new cars has increased 26.6%, a 4.8% annual growth rate. The average amount financed for used cars increased by a similar amount (27.9%, a 5.0% annual growth rate). We note that average loan amounts have stabilized post-pandemic for both new and used cars.
Figure 1: Average amount financed ($ thousands)
Source: FRED
Simultaneously, used car loan terms have lengthened, with 72- and even 84-month terms becoming commonplace. These longer durations, while helping consumers manage monthly payments, also increased lenders’ exposure to depreciation and credit risk. Terms for used car loans have historically been shorter than new cars; however, this gap no longer exists, as can be seen in Figure 2. Over a five-year span from 2019 Q2 to 2024 Q2, the average maturity for used cars has increased by four months.
Figure 2: Average maturity of car loans (months)
Source: FRED
Auto loan delinquencies are on the rise. After an extended period of historically low default rates buoyed by stimulus payments, forbearance programs, and elevated vehicle values, delinquency rates have returned to or surpassed pre-pandemic levels. This increase is driven by subprime borrowers (borrowers with credit scores less than 620), as can be seen in Figure 3. The current 60-day delinquency rates for subprime borrowers are the highest they have been in the post-financial crisis era, and recent increases are likely due to the ending of forbearance for many subprime borrowers.
Figure 3: 60-day delinquency rate
Source: Fitch Ratings
The result of rising loan balances due to lengthening terms and high interest rates, along with high delinquency rates, has led to a very stark increase in total delinquent auto loan balance across the industry, now exceeding $60 billion in 2025.
Figure 4: Total delinquent auto loan balance ($ billions)
Source: Equifax; Moody's Analytics
Used vehicle prices, which surged during the height of pandemic-era shortages, are now stabilizing or falling as supply conditions improve. For lenders, this presents a renewed source of residual value risk. Loan-to-value ratios that looked acceptable at origination may now be challenged, especially in the event of borrower default. Vehicles that would have fetched high recovery values in 2021 or 2022 may now sell for significantly less, impairing collections and exposing assumptions that may have relied on unsustainable collateral valuations. Figure 5 shows that recovery rates on repossessed vehicles have lowered substantially for both prime and subprime borrowers in recent years.
Figure 5: Recovery rate
Source: Fitch Ratings
The auto ABS market
One way auto lenders can access new capital to continue issuing loans in a challenging environment is to issue asset-backed securities (ABS). Auto ABS are financial instruments backed by pools of auto loans or leases issued by companies that allow the pass-through of monthly interest and principal payments from borrowers to investors. The industry has seen an increase in total ABS issuance that is not consistent with other forms of consumer debt, as can be seen in Figure 6. Total auto ABS issuance increased to almost $150 billion in 2024 compared to about $134 billion in 2023.
Figure 6: ABS issuance by consumer loan type ($ billions)
Source: SEC, Division of Economic and Risk Analysis
Although issuing auto ABS provides lenders with an effective tool for new capital, entry is constrained by the requirement for advanced credit risk modeling capabilities. Following the financial crisis, the SEC introduced Regulation AB II, which went into effect in 2014. This regulation required all ABS issuers to provide standardized loan-level disclosures, static pool performance data, and detailed documentation of credit enhancement structures, enabling investors to conduct independent analysis and stress testing.
In this environment, modeling accuracy has become a critical differentiator. Inaccurate loss estimates not only undermine deal pricing but can also force issuers to provide higher levels of credit enhancement, reducing execution efficiency and raising funding costs. They may also invite heightened scrutiny from rating agencies and investors, potentially delaying issuance or jeopardizing market access. As regulatory expectations and investor sophistication continue to rise, lenders are expected to demonstrate robust governance over their models. This includes documenting assumptions, validating methodologies, and running comprehensive stress scenarios. Those unable to meet these standards risk being viewed as higher-risk issuers, while those who invest in stronger analytics can gain a competitive advantage in both pricing and investor confidence.
Conclusion
Auto lending is at a crossroads. With elevated risks at origination, securitization, and recoveries, the need for robust, credible, and forward-looking modeling is more urgent than ever.
Lenders who respond by upgrading their credit risk infrastructure, not just to meet compliance but to improve strategic insight, will be better positioned to navigate this new reality.