Auto loans are rated “subprime” for the same reason a lot of bonds are rated “junk” (BB+ and below): the borrower has a much higher risk of defaulting on the debt. And investors take big risks to make lots of money.

These subprime delinquencies are not a sign that the overall consumer is getting in trouble or whatever. We can see that because prime-rated auto loans are in pristine shape with a 60-day delinquency rate of only 0.2%, according to the ABS rated by Fitch. In other words, nearly all delinquencies are in the relatively small subprime-rated pocket of auto loans, and the prime delinquency rate remains near historic lows.

But these subprime delinquencies are a sign that subprime lending by specialized lenders had gotten very loosey-goosey, with ridiculous Loan-to-Value ratios and super-loose, often AI-driven underwriting standards. And this was particularly the case during the free-money era of the pandemic.

Subprime is teeming with abuses and scandals. Some subprime loans come with such high interest rates that practically guarantee the loans will default. Occasionally regulators crack down, but settlements and fines are just part of the cost of doing business.

Delinquencies in Subprime Auto-Loan-Backed Securities Have Second-Worst April Ever, Behind only Lockdown April: The Cost of Free Money | Wolf Street