The Auto Subprime Crisis: Is 2025 Becoming the Next 2008?

Key Concepts

• Subprime Auto Crisis
• Delinquency Rates
• Credit Scores (Prime, Subprime, Deep Subprime)
• Auto Loan APRs
• Negative Equity in Trade-ins
• Car Insurance and Repair Costs
• Low-Income and Younger Households
• Credit Score Protection
• 10% Car Payment Formula
• Cash Car Purchases

Subprime Auto Crisis in America

The video highlights a significant and growing subprime auto crisis in America, drawing parallels to the 2008 mortgage crisis. The core issue is the increasing rate of delinquency on auto loans, particularly within the subprime borrower segment.

Delinquency Rates and Historical Context

• Current Delinquency: In October, 6.65% of subprime auto borrowers were 60 days late on payments. This translates to one in 15 subprime borrowers being seriously behind.
• Trend: This rate is double what it was just three years ago and is 1.424% higher than the peak seen in 2008.
• Prime vs. Subprime: In contrast, only 37% of prime borrowers (one in 270) are 60 days behind, indicating the issue is concentrated in the subprime market.
• Record Highs: Data shows current subprime delinquency rates are at record-breaking levels, surpassing previous peaks in the late 1990s and 2008.

Defining Borrower Tiers

• Subprime Borrowers: Typically have credit scores between 580 and 680.
• Deep Subprime Borrowers: Have credit scores from 0 to 580.
• Prime Borrowers: Have credit scores of 660-680 and above.

Scale of the Problem

• Total Auto Debt: Americans owe $1.66 trillion on car loans.
• Subprime Loan Share: Subprime loans constitute 15% to 20-22% of this total, representing approximately $250 billion to $370 billion in subprime auto debt.

Factors Contributing to the Crisis

Several interconnected factors are exacerbating the subprime auto loan situation:

Rising Car Prices and Loan Terms

• Price Inflation: Average car prices have surged from $30,000 in 2012 to $40,000 in 2020, and further to $51,000 in the last four years. Electric Vehicles (EVs) are even higher, averaging $58,000.
• Increased Payments: The average new car payment is now between $745 and $767, with 20% of borrowers paying $1,000 or more per month.
• Extended Loan Terms: Loans are being stretched to 6 to 7 years, making it harder for borrowers to build equity.

Interest Rates and APRs

• Impact of Rate Hikes: Rising interest rates have significantly increased the cost of borrowing for consumers.
• Subprime APRs: Subprime borrowers face extremely high Annual Percentage Rates (APRs).
  • Subprime to deep subprime borrowers can see rates around 16%.
  • Used subprime loans can have APRs of 21% to 21.66%.
  • Worst-case scenarios can reach 30% to 32%.
• Historical Anecdote: The speaker recalls a personal experience in 1997 buying a car with a 33% APR, where initial payments were almost entirely interest.
• Prime APRs: Prime borrowers with good credit typically have APRs around 8% to 9% for new cars.

Negative Equity in Trade-ins

• Rolling Over Debt: When borrowers trade in a vehicle, a significant portion (28% in recent cases) are in negative equity, meaning they owe more on the car than it's worth.
• Dealer Practices: Dealerships often roll this negative equity into the new car loan, increasing the total debt and monthly payments for the buyer. For example, a $6,000 car worth with an $8,000 loan, when buying a $12,000 car, might result in a $14,000 loan after rolling over the $2,000 deficit.

Rising Insurance and Repair Costs

• Increased Expenses: Car insurance premiums and repair costs have risen substantially in recent years due to factors like COVID-19, auto theft, and supply chain issues affecting parts availability and pricing.

Impact on Specific Demographics

• Disproportionate Effect: The crisis is disproportionately affecting low-income and younger households, who are experiencing the economic strain as if they are in a recession. Prime borrowers are largely unaffected.

Company Bankruptcies in the Subprime Auto Sector

The growing distress in the subprime auto loan market is evidenced by recent company failures:

• September 2025: A company specializing in subprime auto loans (name not clearly pronounced but implied to be significant) went bankrupt and shut down.
• October 2025: Primoland, another company focused on subprime auto loans, also ceased operations.
• Chase's Stance: Chase Bank has reportedly stopped lending altogether due to the increasing delinquencies in this sector.

Solutions and Recommendations

The video offers practical advice for individuals to navigate and avoid the pitfalls of the subprime auto market:

1. Protect Your Credit Score

• Importance: A strong credit score is crucial for accessing favorable loan terms and avoiding high interest rates.
• Warning Against Co-signing: The speaker strongly advises against co-signing for car loans for others, even family members. He cites instances where parents have put cars in their children's names, leading to defaults and severe credit damage for the young individuals. The advice is to "No. I'm not co-signing. Period." and to offer a smaller cash gift instead.
• Benefits: A good credit score aids career prospects, saves money on loans, and improves financial stability.

2. Implement the 10% Car Payment Formula

• Concept: Allocate no more than 10% of your monthly take-home pay towards a car payment.
• Example: For an income of $50,000 annually, with a monthly take-home of $3,200 (after taxes), the maximum car payment should be $320 (10% of $3,200).
• Rationale: This formula prioritizes affordability and prevents overspending on vehicles, even if it means driving a less luxurious car initially. The speaker shares his own experience of driving a Ford Focus on a $228/month payment while saving aggressively.

3. Prioritize Cash Purchases

• Ideal Scenario: The most financially sound approach is to buy a car with cash, thereby eliminating car payments entirely.
• Peace of Mind: This allows for a more peaceful financial lifestyle, free from the pressure of monthly loan obligations and the desire to impress others with expensive vehicles.
• Long-Term Savings: Not having a car payment, especially from a young age, can lead to significant savings over time.

Conclusion and Call to Action

The subprime auto crisis is a serious and escalating issue, primarily impacting low-income and younger demographics due to rising car prices, high interest rates, extended loan terms, and increased associated costs like insurance and repairs. The speaker emphasizes the critical importance of maintaining a strong credit score, adhering to strict affordability guidelines like the 10% rule, and ideally, saving to purchase vehicles with cash.

For those seeking further information, the video directs viewers to the "PBD Entrepreneur Circle" via a QR code for free notes and research. Viewers are also encouraged to like the video, subscribe to the channel, and watch other related content on investments and money.