Auto Defaults Just Passed the 2008 Peak

A 2022 pickup truck sits on the auction block at Manheim in Atlanta. It was financed at $55,000 on an 84-month loan. The hammer falls around $16,000. The lender eats the other $39,000.

I can't stop thinking about where that money goes. It does not vanish. It flows into bonds cut from pools of car loans just like that one. Those bonds sit inside short-term bond funds and income ETFs. Funds like the Vanguard Short-Term Bond ETF (BSV, nearly $70 billion in assets). You parked money there because it was supposed to be boring. Some of that fund owns bonds backed by car loans. And those car loans are blowing up.

Serious late payments on auto loans hit 5.5% of total balances in Q2. That tops the Great Recession peak of 5.3%. It is a new record. I checked the data going back to 2003. It has never been worse. Subprime late payments past 60 days hit 6.9% in January. A 32-year high. Repos hit 1.73 million cars in 2024, up 43% from 2022, the most since 2009. This year they are tracking toward 3 million. Over 100 million Americans carry an auto loan right now. Total auto debt tops $1.66 trillion.

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The numbers are bad. The reason is worse. I don't think most people realize which loans are blowing up. It is not old debt. It is the cars people bought three years ago. The 2022 and 2023 vintages. Cars bought at peak sticker prices near $50,000. Financed at peak rates. Stretched to 84 months. Those cars lose value faster than the loan balance shrinks. Nearly 31% of trade-ins in Q1 carried negative equity. A record. The average borrower was underwater by $7,183. Some rolled that gap into a new loan. They wound up paying $932 a month. Those are the loans inside the bonds.

Here's what worries me. Older, healthier loans pay off and leave the index. The weak 2022-2023 paper takes up a bigger share of what remains. Fitch flagged this directly. The riskiest loan pools made up 10% of subprime auto bonds in 2009. By 2025 they were a third of subprime auto bonds. Big banks grew their subprime auto lending by over 15%. The car makers' own lending arms pulled back. Subprime now makes up nearly 14% of all auto loans. Auto bonds are 38% of the entire U.S. asset-backed market. That is $292 billion. The index is getting worse. Not better.

When those loans default, the recovery is brutal. Lenders get back about 30 cents per dollar after the repo and auction. Thirty cents. The other 70 cents is a loss. Loss rates on subprime auto bonds hit 9.81% a year by January. The worst group lost 19.1 cents per dollar at the peak. Those were loans from 2022. The Philadelphia Fed found something uglier. Borrowers who fall behind are not catching up. Late payments have doubled since 2021 for borrowers with scores below 670. New late payments are flat. But the stuck group keeps growing. They sit in a pipeline that ends at the auction lot.

So who holds this paper? You might. BSV keeps about 30% of its money outside Treasuries. That chunk holds corporate bonds and bonds backed by loans. The Vanguard Short-Term Corporate Bond ETF (VCSH) holds $45 billion. Nearly 45% of it is BBB-rated. Auto loan bonds pay a bit more than other short-term bonds with the same rating. Fund managers load up for that extra yield. And money is pouring in. Fixed-income ETFs have pulled in $460 billion so far this year. That already tops the $435 billion they gathered in all of 2025. Short-duration funds are taking the biggest share. Active managers claim they can dodge the bad bonds. Passive funds cannot. They hold whatever the index holds. Nobody knows how much of that safe fund rests on a truck in a Georgia lot. That is the problem.

I don't know when the ratings catch up to the losses. Nobody does. Fitch says subprime borrowers still face high living costs and steep debt loads. The job market is cooling. Losses will keep climbing through year-end. The index only heals when the weak vintages pay down. That takes years. We are watching loans that are only three years into seven-year terms. The worst may not be over.

Thirty cents on the dollar. That is the number. A lender repos a car financed at peak prices three years ago. Sends it to auction. Gets back thirty cents. The other seventy cents is a loss. It lands in a bond. That bond sits in a fund you bought to be boring. Remember that number.

I keep coming back to those trucks on the lot. Rows of them baking on asphalt in the Georgia sun. Every one was somebody's safe bet. The borrower thought the truck was safe. The lender thought the loan was safe. And somewhere a retiree thinks the bond fund holding that paper is safe too.

More on this tomorrow.

— American Ledger