The Other Auto Loan Market: What the Fed Just Found Inside Buy Here Pay Here

6-minute read

The Federal Reserve published a research note on May 8. Five economists spent months inside two federal datasets, the New York Fed's consumer credit registry and the regulatory data from the largest bank holding companies in America, to answer a simple question: what is actually happening inside the Buy Here Pay Here auto lending sector?

The answer is more complicated than the headline numbers suggest. And the headline numbers are already alarming.

The sector is small but growing at a pace that is anything but small.

As of Q3 2025, BHPH dealers hold approximately $32 billion in outstanding auto loans. That is 2% of the total $1.6 trillion auto loan market. It sounds minor. But BHPH loan balances have grown 214% since 2018. Traditional auto finance grew 34% over the same period. BHPH is not a niche. It is a niche that is growing six times faster than the mainstream market.

The customers it is growing with are exactly who you would expect, and slightly different than you might assume.

In 2018, 70% of all BHPH lending volume went to deep subprime borrowers, defined as credit scores below 580. By 2025 that share had declined to slightly above 50%. On the surface, that looks like BHPH dealers cleaning up their book. What it actually reflects is expansion, not improvement. BHPH dealers are not losing deep subprime customers to traditional finance. Traditional auto finance has held its deep subprime share flat at approximately 15% since 2018. BHPH is adding customers from higher credit tiers while keeping its core base intact.

The result: 78% of BHPH lending volume is to subprime borrowers. At traditional lenders, 27%.

The interest rate charged to those borrowers is the number that should make anyone stop reading and look up.

For subprime borrowers at BHPH dealers, the average weighted interest rate is 25.39%. The Fed's note puts that in plain terms: it is more similar to a high-interest credit card than to a secured auto loan. Prime borrowers at traditional auto lenders pay 5.65%.

The average BHPH subprime loan originates at $15,402 with a monthly payment of $405 over a 55-month term. The borrower is paying $405 a month on a $15,000 car at 25% interest. The average new vehicle payment at a traditional dealer right now is $767 a month on a $44,000 vehicle at 6.9%. The BHPH customer is spending more than half as much per month on a vehicle worth roughly a third as much, at an interest rate nearly four times higher.

The delinquency and repossession data is where the Fed's note becomes most significant.

10% of BHPH loan balances were delinquent as of Q3 2025. Traditional auto lenders: 3.8%. BHPH delinquency is 2.65 times higher.

But the repossession gap is the number that is harder to process. BHPH balances are 16.63 times more likely to be in active repossession status than traditional auto loan balances.

In Q3 2025, approximately 5% of BHPH balances were in active repossession. Traditional lenders: less than half a percent.

The Fed's note is careful about how it frames this. The repossession rate is partly a feature, not just a flaw. BHPH dealers use repossession as a loss mitigation tool. They charge 25% interest, require weekly or biweekly payments in many cases, and move to repossession faster than a bank ever would. The model is designed around the assumption that a meaningful share of customers will not complete the loan. Repossession is how the dealer recovers the asset and resells it.

This is where Tricolor comes in.

Tricolor was one of the largest BHPH operators in the country, concentrated in Texas and other states with favorable repossession laws. In 2025 it filed for bankruptcy alongside allegations of fraud. Fifth Third Bank and JPMorgan Chase each took losses of approximately $200 million from exposure to Tricolor.

That is not a BHPH customer problem. That is a large bank balance sheet problem.

The Fed found that more than a dozen banks, all large enough to file regulatory data with the Federal Reserve, have collectively committed more than $2 billion in corporate lending to BHPH dealer networks including DriveTime, Byrider, America's Car-Mart, and Tricolor. They lend through floor plan lines, asset-based facilities, and in some cases through special purpose entities that make the exposure opaque.

The structural protections on those loans are real. 81% of bank loans to BHPH dealers are fully backed by a guarantor. 65% are classified as asset-based lending, overcollateralized against the dealer's loan receivables. 13% are structured through SPEs that legally isolate the underlying collateral in bankruptcy. Tricolor's bank facilities were typically advanced at only 60 to 80 cents on the dollar of the underlying auto loan value.

The protections looked sufficient until they did not. After Tricolor's bankruptcy, the probability of default assigned by banks to their BHPH loan portfolios increased by nearly 150% in a single quarter.

The $32 billion question for traditional dealers is not whether they compete with BHPH. Most do not. The customers who finance through BHPH are largely customers who cannot access a traditional dealer's F&I office. A 580 credit score, a thin file, a prior repossession: these are the profiles that get declined at the desk and end up at a BHPH lot down the street.

The question is what happens to those customers and what it means for the broader market.

When 5% of the BHPH book is in active repossession in a single quarter, those vehicles have to go somewhere. They go back through auction. They add supply to the used vehicle market. They compete with the certified pre-owned inventory on your lot. The knock-on effects of a stressed BHPH sector are not contained to the sector.

When banks that have been lending $2 billion to BHPH operators start tightening credit after a high-profile bankruptcy, BHPH dealers with fewer options start either pulling back volume or finding new funding sources, which can mean looser underwriting, higher rates, and faster repossession cycles. The borrower at the end of that chain has fewer and worse options, not more.

The Fed's note does not prescribe a policy response. It documents a market. But the documentation is stark. A sector representing 2% of outstanding auto loans has a repossession rate 16 times higher than the rest of the market, has grown six times faster since 2018, and just watched its largest player collapse with $400 million in bank losses.

The traditional auto finance market is one ecosystem. The BHPH market is another one entirely operating alongside it, and last week the Federal Reserve told you exactly what is inside it.

Source: Chyruk, Cox, Liu, Wang, and Zoulalian. Subprime Auto Lending: Trends in Buy Here Pay Here Auto Lending. FEDS Notes. Board of Governors of the Federal Reserve System. May 8, 2026. https://www.federalreserve.gov/econres/notes/feds-notes/subprime-auto-lending-trends-in-buy-here-pay-here-auto-lending-20260508.html

Daniel Govaer

EVP Product VINCUE | Loyalty Project Manager Beaver Toyota | Dealer Innovation Group Facilitator MyKaarma | Former Award Winning Mercedes-Benz General Manager | NADA Academy Class N367 Graduate

dgactual.com | @DGActual