Introduction

The US subprime auto lending market occupies a unique and polarizing position within the investment community. On one hand, it is often criticized for its association with predatory lending practices, where borrowers with poor credit histories are charged exorbitant interest rates, sometimes leading to financial distress. This stigma has fueled widespread skepticism about the ethics and sustainability of the sector. 

On the other hand, certain companies, such as Credit Acceptance (CACC), have defied these perceptions by consistently delivering per-loan ROEs exceeding 30%. Such a duality - between the ethical concerns and the undeniable profitability - spurred our interest to study the industry and led to this IP Research roundup that compiles our learnings to date on the subject.

Market Size, Segments & Cycles

The US auto subprime lending market is large.

“The auto finance market is large and fragmented, with $1.3 trillion in outstanding loan balances as of December 31, 2021… Our potential customer market is large. Approximately 40% of adults in the United States have a credit profile that is considered less than prime. That's roughly 100 million adults.” - FY 2021 Credit Acceptance Letter to Shareholders

In dollar terms, total US subprime auto originations (defined by credit scores less than 620) have amounted to approximately $100 billion per year for the past decade.

This represents 10-15% of total auto originations in any given year.

There are three main segments of lenders in the US subprime auto market: