The Risk Didn’t Leave Auto Finance, It Changed Hands

Major lenders are pulling back from non-prime auto while dealers search for replacements and increasingly stretched loan structures are keeping the credit flowing.

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Auto credit is easier to obtain than it has been in more than a decade. At almost the same moment, a major U.S. bank has decided it wants out of a $5.5 billion near-prime auto portfolio. Those two developments sound contradictory.

They may actually be telling the same story.

The risk hasn’t disappeared from auto finance. It may simply be changing hands.

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Credit Is Opening Up, But Not Because Money Got Cheaper

The latest Cox Automotive Dealertrack Credit Availability Index reached 105.3 in August, its highest level since November 2015 and 7.7% higher than a year earlier.

On its face, that sounds encouraging. Credit is becoming more available.

But look underneath the index and the story changes.

Cox reported that the improvement was driven largely by loan structure rather than cheaper borrowing.

The share of auto loans extending beyond 72 months reached a record 31.3%. The share involving negative equity increased to 57.4%. Meanwhile, the average contract interest rate actually increased nine basis points to 10.99%.

In other words, lenders aren’t necessarily making vehicles more affordable. They are finding ways to make the payment fit.

Longer terms lower monthly payments. Rolling negative equity into the next vehicle gets another transaction across the finish line. Smaller equity cushions allow consumers to finance more of the purchase.

Each can help produce an approval but they can also leave borrowers underwater longer.

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Meanwhile, One Major Lender Is Heading for the Exit

Against that backdrop came a striking announcement from Truist.

On September 15, Truist announced plans to sell approximately $5.5 billion of near-prime auto loans representing substantially all the assets of its Regional Acceptance Corporation subsidiary.

The transaction is expected to generate approximately $5.2 billion in net proceeds and allow Truist to recapture roughly $535 million in loan-loss reserves.

Regional Acceptance wasn’t necessarily a collapsing business. Truist reported that it produced approximately break-even pretax earnings during the first half of 2026.

Instead, Truist described near-prime auto as a non-core, less profitable business and said exiting it would improve its credit-risk profile, capital efficiency, liquidity and resilience under stress. The bank also expects the transaction to reduce nonperforming loans by more than 10 basis points and annual net charge-offs by approximately 10 basis points.

That distinction is important because this isn’t a lender being forced out after catastrophic losses. It is a large financial institution looking at the economics and risk of near-prime auto and deciding that its capital can be put somewhere else.

But the borrowers Regional Acceptance financed aren’t going anywhere.

Neither are the dealers trying to sell them cars.

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Dealers Are Already Looking for Replacements

That brings us to what may be the more revealing development.

Auto Finance News reported September 23 that independent dealerships are increasingly approaching smaller non-prime lenders as larger finance companies reduce non-prime lending or leave portions of auto finance altogether.

Midwest Acceptance Corporation COO Ray Knapp told the publication that several independent dealers had approached his company looking for financing options since September 2.

Midwest Acceptance’s dealer network has grown 5% year over year.

One regional lender doesn’t establish an industry-wide migration, but it does illustrate something fundamental about indirect auto lending.

When one lender leaves, dealer demand doesn’t leave with it.

The dealer still has a vehicle to sell, the customer still needs financing and somebody has to decide whether to make the loan.

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Follow the Risk

Consider what is happening simultaneously.

Auto credit availability is at its highest level in more than a decade. Loan terms longer than 72 months have reached a record share. Negative equity is present in more than half of financed transactions measured by Dealertrack.

Subprime’s share of lending has increased.

A major bank is exiting $5.5 billion of near-prime auto exposure and independent dealers are approaching smaller non-prime lenders looking for additional financing capacity.

Put those developments together and a different picture emerges.

The question may no longer be whether lenders are accepting auto credit risk., it may be which lenders are accepting it.

There is an important caution here.

There is no evidence that the smaller lenders being approached by dealers are necessarily underwriting worse loans than the large lenders pulling back. Nor does increased dealer demand mean those lenders will accept every application put in front of them, but competitive pressure deserves attention.

When financing capacity disappears from one part of the market, dealers have a powerful incentive to find it somewhere else.

And smaller lenders have an equally understandable incentive to capture business abandoned by larger competitors.

That is where underwriting discipline becomes especially important.

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The Monthly Payment Can Hide the Problem

The increasing reliance on longer terms adds another layer of issues.

An 84-month loan can turn an unaffordable payment into an affordable-looking one without changing the price of the vehicle.

Negative equity can allow a consumer to leave a dealership with another vehicle without eliminating the loss embedded in the previous one.

The loan closes, the vehicle leaves the lot and everyone moves forward.

But depreciation keeps moving too.

A borrower who encounters unemployment, reduced income, divorce, medical expenses or another financial shock several years into an extended-term loan may still owe substantially more than the collateral is worth.

That eventually stops being an underwriting problem and becomes a collections problem and frequently becomes a repossession and remarketing problem.

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Large Lenders Have an Escape Hatch

There is another reason the movement toward smaller lenders deserves watching.

Large financial institutions have options.

Truist can look at billions of dollars in near-prime auto exposure and decide to sell substantially all of it. The bank expects to receive $5.2 billion, release hundreds of millions in reserves, reduce nonperforming assets and redeploy capital elsewhere.

Many smaller finance companies and credit unions don’t have that degree of flexibility.

They may have to hold loans much longer and may have fewer funding alternatives.

They may rely more heavily on their existing servicing and collection operations when credit performance deteriorates.

And when defaults occur, they may depend more heavily on the recovery and remarketing infrastructure surrounding those loans.

That makes the identity of the lenders absorbing displaced non-prime volume worth watching.

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Credit Unions Should Be Watching the Door

There is a credit-union angle here as well.

Dealer relationships are valuable. When another lender retreats, the opportunity to capture additional indirect volume can be tempting. But additional volume isn’t automatically good volume.

A credit union considering expansion into business abandoned by another lender should be asking more than whether it can approve the loans, iIt should be asking what those loans will look like 24, 36 or 48 months later.

How much negative equity will remain?

How quickly will principal decline?

What happens if used-vehicle values weaken?

What percentage of borrowers will have realistic modification or refinance options?

And what will the collateral be worth if the loan eventually reaches repossession?

Those aren’t questions for the collections department after the loan goes bad, they are underwriting questions before the loan is ever booked.

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The Risk Didn’t Disappear

There is nothing inherently alarming about large lenders exiting a market or smaller lenders entering it.

Capital moves.

Risk appetites change.

Business strategies change.

And specialized lenders have successfully served borrowers that larger banks either cannot or do not want to finance for decades.

But the combination of today’s developments deserves attention.

Credit is becoming easier to obtain partly because lenders are stretching terms and accommodating more negative equity.

At the same time, at least one major institution has decided that billions of dollars of near-prime auto exposure no longer fits its strategy, while smaller lenders report dealers knocking on their doors looking for replacement financing.

That doesn’t mean auto credit risk is disappearing, quite the opposite.

The loans are still being made. The vehicles are still being financed. The negative equity is still there.

The question is increasingly becoming: Who will be holding that risk when the payment finally stops?