Auto Financing & Leasing

# Executive Summary * The auto finance industry faces a critical test as rising loan delinquencies, now at a post-2009 high, pressure profitability and force a widespread tightening of credit standards. * Persistently high interest rates are eroding consumer affordability, slowing loan origination growth and shifting demand towards leasing, particularly for higher-priced electric vehicles. * Digital transformation and AI are no longer optional but essential tools for survival, enabling leading firms to improve underwriting accuracy, enhance operational efficiency, and combat rising fraud. * The accelerating shift to EVs introduces significant residual value risk, making leasing a dominant financing model but challenging traditional risk assessment. * A complex regulatory and trade environment, including potential compensation schemes in the UK and US tariffs, adds a layer of uncertainty and potential cost to the industry. ### Key Trends & Outlook The primary challenge facing the auto finance and leasing industry in 2025 is a significant deterioration in credit quality, driven by sustained affordability pressures. Auto loan delinquency rates have surged to 7.9% in Q1 2025, the highest level since 2009, with subprime borrowers under the most strain. This is a direct result of high vehicle prices, with the average new vehicle retail price exceeding $48,000, and elevated interest rates, which reached 6.7% for new car loans in Q1 2025 and 11.62% for used cars in Q4 2024. The impact is evident in lenders' financial results, with Credit Acceptance Corporation (CACC) reporting that its 2022, 2023, and 2024 loan vintages continued to underperform expectations in Q3 2025, while CarMax (KMX) saw its CarMax Auto Finance (CAF) income decline 7% due to increased provision for loan losses, particularly for 2022 and 2023 vintages. In response, a broad-based tightening of underwriting standards is underway across the industry. Amidst macroeconomic headwinds, lenders are aggressively adopting AI and digital platforms to gain a competitive edge. These technologies are being deployed to automate credit decisions, improve the accuracy of risk models, reduce fraud, which is projected to climb to $8.5 billion in 2025, and streamline the customer experience. Firms that successfully integrate these tools are better positioned to manage risk and operate more efficiently in a challenging market. Ally Financial (ALLY) leverages its proprietary AI platform, Ally.ai, for operational efficiency, having rolled it out to over 10,000 employees in Q3 2025, while Lithia Motors, Inc. (LAD) is streamlining operations and enhancing customer experience through investments in Pinewood.AI and its MyDriveway portal. The consumer shift towards leasing, especially for electric vehicles (EVs), presents an opportunity for lenders to capture a growing market segment, though it requires sophisticated residual value risk management. Leasing now accounts for 24.7% of new vehicle transactions in Q1 2025, with nearly 60% of new EV originations being leases in Q3 2025. However, the industry faces significant regulatory and geopolitical risks, including a potential multi-billion-pound compensation scheme in the UK proposed by the Financial Conduct Authority (FCA) and the impact of US trade tariffs, such as the 25% tariff on imported medium and heavy-duty trucks effective November 1, 2025, on vehicle costs and supply chains. ### Competitive Landscape The auto financing and leasing market is highly fragmented, comprising several distinct business models. Major players include the captive finance arms of automakers, large independent banks and finance companies, specialized subprime lenders, and the integrated finance operations of large dealership groups. Some of the largest players are the captive finance arms of major automakers, such as GM Financial, the financing arm of General Motors (GM). Their primary role is to support the sale of their parent company's vehicles, often by offering subsidized interest rates or attractive lease terms that independent lenders cannot match. This provides a steady stream of customers but ties their fortunes directly to the sales performance and strategic shifts, like the transition to EVs, of a single manufacturer. In contrast, diversified independent finance companies like Ally Financial compete by building broad networks of dealer partners across many brands. Their success depends on sophisticated underwriting, competitive pricing, and strong dealer relationships, giving them a more diversified portfolio but exposing them directly to market-wide credit cycles and intense competition for dealer loyalty. A growing force is the integrated retailer-lender model, exemplified by companies like CarMax (KMX). By controlling both the vehicle sale and the financing through its CarMax Auto Finance (CAF) division, these companies aim to capture the full profit of the transaction and create a seamless customer experience. This model requires significant scale and expertise in both retail and lending. Finally, specialized lenders such as Credit Acceptance Corporation (CACC) focus on the high-risk, high-yield subprime segment. They provide financing to consumers who are unable to secure credit from traditional sources. While this niche offers the potential for higher margins, it also carries significantly elevated risk, making these firms particularly vulnerable to economic downturns and rising default rates. ### Financial Performance **Revenue** Revenue trends are bifurcating, driven by strategic choices in a high-risk environment. The divergence in revenue is a direct consequence of lenders' response to rising credit risk. Some firms are actively shrinking their auto loan portfolios by tightening credit standards, leading to lower origination volumes and revenue. Wells Fargo & Company (WFC), for instance, saw its auto loans decrease by 11% in Q1 2025, reflecting a strategic credit tightening. Others with more advanced risk models or a higher risk tolerance may still be growing, albeit more cautiously. The key driver is the trade-off between market share and credit quality, with major players prioritizing risk management over top-line growth in the current climate. {{chart_0}} **Profitability** Profitability is under significant pressure across the board, but performance varies based on underwriting discipline and funding costs. Profitability is being squeezed from two directions: elevated interest rates increase the cost of funds for lenders, and rising delinquencies are forcing companies to set aside more money for loan losses, directly hitting the bottom line. Companies that originated loans aggressively in 2022-2023 are now seeing those vintages underperform, as noted by Credit Acceptance Corporation (CACC), whose 2022, 2023, and 2024 loan vintages continued to underperform expectations in Q3 2025. CarMax (KMX) also reported that its CAF income was down 7% due to increased provision for loan losses, particularly for 2022 and 2023 vintages. {{chart_1}} In contrast, firms like Ally Financial (ALLY) and Capital One Financial Corporation (COF) are demonstrating the value of disciplined underwriting. Ally's retail auto net charge-offs declined to 1.88% in Q3 2025, a 36 basis points year-over-year improvement driven by tighter underwriting, with full-year 2025 net charge-offs projected at approximately 2%. Capital One's auto net charge-off rate decreased 44 basis points year-over-year to 1.55% in Q1 2025. This showcases a clear divergence in performance, with strong underwriting quality proving to be a critical differentiator in maintaining profitability. **Capital Allocation** A clear shift towards capital preservation and risk mitigation is evident in the industry's capital allocation strategies. Given the uncertain economic outlook and rising credit losses, the primary focus has shifted from aggressive growth or shareholder returns to bolstering balance sheets. This is demonstrated by widespread credit tightening and increased provisions for losses, which are actions designed to preserve capital and ensure stability through a potential downturn. Wells Fargo's (WFC) 11% reduction in its auto loan book in Q1 2025 serves as a prime example of a capital allocation decision prioritizing de-risking over expansion. {{chart_2}} **Balance Sheet** The industry's collective balance sheet is stressed, with growing risk. The total auto loan market stands at a massive $1.7 trillion, but the quality of those assets is deteriorating, as evidenced by delinquency rates hitting 7.9% in Q1 2025, the highest since 2009. This increases the risk profile of the entire sector and raises concerns about future write-offs and the valuation of loan portfolios, especially those with significant subprime exposure. America's Car-Mart, Inc. (CRMT), specializing in in-house financing for older model used vehicles to subprime customers, reported a net loss in Q1 FY26, with net charge-offs as a percentage of average finance receivables increasing to 7.2%, illustrating how balance sheet stress is translating into negative earnings. {{chart_3}}