Automotive Lending Shows Shrinkage in Subprime Sector During Q1
In the ever-evolving world of auto finance, a notable trend is emerging: an increased preference for leasing, particularly for electric vehicles (EVs), and relatively low delinquency rates for both prime-risk and subprime borrowers.
Leasing of new vehicles is on the rise, with more than half of new EV transactions in early 2024 being leases. This shift is driven by financial flexibility, tax incentives, lower upfront costs, and uncertainties around EV technology and battery repair costs. Manufacturers are promoting leasing as a strategy to engage customers long term and manage inventory turnover more efficiently.
Despite this surge in leasing, delinquency rates remain low but have seen slight recent upticks. The overall 60-plus-day delinquency rate for auto loans and leases was approximately 1.44% in June 2025, a slight increase from previous months but still below seasonal highs. For prime-risk borrowers, delinquency remains very low at 0.34%, up marginally from 0.29% a year earlier, yet well below historical highs even during the Great Recession.
However, the subprime segment faces a contraction in lending volume. Subprime auto loan originations dropped to 14% of total auto loans and leases in 2024, with some lenders pausing or curtailing lending due to funding challenges and rising loss severity. Some subprime borrowers are strategically abandoning loans to refinance at lower interest rates, complicating repossession efforts for lenders.
Interest rates for auto loans remain higher for borrowers with lower credit scores, reflecting their higher risk profiles. This influences financing strategies for prime and subprime borrowers alike.
The New York Federal Reserve has recently released its Quarterly Report on Household Debt and Credit, providing insights into the current state of the auto finance market. The report highlights that household net worth looks strong, except for borrowers with the lowest credit scores who may be struggling to pay their household bills. Additionally, the resumption of student loan payments could potentially reduce the amount of money available for auto loans for some households.
The rate at which auto finance accounts are transitioning into delinquency is leveling off, according to Fed researchers. However, it's important to note that the auto finance statistics for the first quarter of 2025 do not include the late-March surge in demand due to a time lag in monthly reporting.
In summary, the auto finance market in 2025 is characterised by a more cautious and flexible approach, with leasing increasingly favoured, particularly for EVs, while prime borrowers maintain very low delinquency rates. Subprime lending contracts amid increased risk and funding issues, which could impact the subprime sector in the medium term.
The industry is observing an increase in auto leasing, particularly for electric vehicles, and finance plays a significant role in this trend due to the financial advantages, such as tax incentives and lower upfront costs. Despite the surge in leasing, delinquency rates for prime borrowers continue to be quite low, with only a slight increase in recent times.
