Editor’s note: Daniel Kline has covered subprime lending and its impact on the economy since the 2008 housing industry crisis.

When the housing industry collapsed in 2008, much of the blame fell on subprime lenders who issued loans that customers could not afford once the economy took a downturn. That led to a huge number of foreclosures and many of those lenders being shut down.

Former Federal Reserve Chief Ben Bernanke spoke to CNBC about the ripple effect that rising home prices and a lack of available credit had on consumers back in 2008.

When declining affordability finally began to take its toll on homebuyer demand and thus on home prices, borrowers could no longer rely on home-price appreciation to build equity; they were accordingly unable to refinance and found themselves locked into their subprime ARM contracts,” he said.

Adjustable Rate Mortgages, or ARMs, adjust interest rates, making a loan that was once somewhat affordable no longer viable for the consumer.

“Many of these borrowers found it difficult to make payments at even the introductory rate, much less at the higher post-adjustment rate. The result, as I have already noted, has been rising delinquencies and foreclosures, which will have adverse effects for communities and the broader economy as well as for the borrowers themselves,” he added.

It was a set of circumstances that tanked the housing market, leaving many people with damaged credit and no place to live. Now, a similar set of market conditions has impacted the subprime car loan market with an industry leader, Tricolor Holdings, filing for Chapter 7 bankruptcy in September.

Why subprime car loans are needed

Nobody has to buy a house. You can rent. Some people can live with family, and others can share a rental with more people than should live there.

Not all of those situations are optimal, but they are options.

Most Americans outside major cities rely on cars for commuting, school, and daily necessities. While subprime loans carry higher rates and fees, they often represent the only option for borrowers with limited credit histories, according to Investopedia.

Owning a car is essential for work and economic participation.

“Since homeownership and college attendance rates are lower for people in these households, an auto loan is often the largest loan an LMI household will ever take out and may be its primary connection to financial markets,” according to the Federal Reserve Bank of Chicago.

Cars literally help people make a living.

“Cars are an important source of wealth and provide substantial economic benefits while also being the largest source of debt for low and moderate-income (LMI) households,” according to the Federal Reserve.

Subprime loans are the only loans for some Americans

A large number of Americans rely on subprime auto loans.

“Subprime loans made up 16.7% of all auto loans for the second quarter (Q2) of 2024,” according to Experian’s State of the Automotive Finance Market report.

“The percentage of subprime borrowers – those with credit scores below 670 – who are at least 60 days late on their car loans has doubled since 2021 to 6.43%, according to Fitch Ratings. That’s worse than during the past three recessions – during the COVID-19 pandemic, the Great Recession or the dot-com bust,” CNN reported in October.

Tricolor’s collapse could make it hard for more Americans to get a car loan.

Tricolor’s collapse could decrease Americans’ access to auto loans.

Shutterstock

Tricolor Holdings collapse hurts LMI households

“Tricolor Holdings, a major player focused on Hispanic and immigrant borrowers, filed for liquidation with more than $1 billion in liabilities after its own business model buckled under rising delinquencies and tighter funding conditions,” The Daily Overview reported on Newsbreak.

That failure, coming on the heels of other distressed lenders, signaled that the combination of high-risk borrowers and expensive capital was becoming increasingly fragile, the site added.

More Bankruptcy:

  • Key auto parts and services company files Chapter 11 bankruptcy
  • Key travel brand files for Chapter 11 bankruptcy
  • Self-driving-car company files for Chapter 11 bankruptcy protection
  • 35-year-old consumer company files Chapter 11 bankruptcy

For lower-income consumers, this has given them fewer, and in some markets, no choices for auto loans. People holding loans impacted by the Tricolor Chapter 7 bankruptcy now risk having their loans fall into the hands of companies willing to aggressively enforce terms, which could lead to repossessions.

Tricolor’s bankruptcy filing has “prompted questions about the health” of the auto finance sector, said Financial Times.

The Texas firm was a “fast-growing lender” that quadrupled in size in recent years, making most of its loans to low-income Latino immigrants and other “borrowers with limited credit histories,” The Week reported.

Tricolor Holdings Chapter 7 bankruptcy facts

  • Tricolor Holdings, a Dallas‑based subprime auto lender and used-car dealer, filed for Chapter 7 bankruptcy in September 2025, according to The Dallas News.
  • Founder and CEO Daniel Chu and other executives were federally charged with fraud for allegedly falsifying loan data and double-pledging collateral to multiple lenders, reported ABC News.
  • Major banks, including JPMorgan Chase, Fifth Third, and Barclays, face hundreds of millions in potential losses, shaking confidence in parts of the subprime auto loan and private credit markets, added KBB.com.
  • Tricolor’s direct Chapter 7 liquidation filing is unusual for a company of its size, according to Auto Remarketing.
  • Tricolor Holdings abruptly shut down ~60 retail locations and terminated about 1,000 employees after filing, according to The Dallas News.
  • The company left 100,000 auto loan accounts and 10,000 vehicles to be liquidated under trustee supervision, shared Evenflo.
  • Two former executives, including the CFO, have pleaded guilty and are cooperating with federal investigations, reported Justice.gov.
    Additional source: PacerMonitor

Tricolor’s collapse had deeper consequences

“Of course, if you have something like this happen, if you have fraud in that area, it becomes harder for those people to get auto loans,” U.S. Attorney Jay Clayton told Click 2 Houston.

The collapse of Tricolor Holdings has contributed to it becoming harder for Some Americans to get a car loan.

“Federal Reserve data show that banks are quietly redrawing their boundaries. According to the Senior Loan Officer Opinion Survey, which tracks lending behavior at major U.S. banks, more lenders are tightening credit standards for car buyers with subprime credit scores and raising the minimum down-payments required to qualify for loans,” reported the Reynolds Center for Business Journalism.

That can have a dangerous ripple effect on those most in need.

“Tighter credit can mean losing the very tool that makes work possible. When lenders pull back, the ripple effects land hardest on people who rely on their vehicles to earn a living,” the business site added.

Related: End of an era: Beloved diner shutters after 140 years