US auto bankruptcies show rising credit pain in low-income households

• Reuters

• Published On Oct 1, 2025 at 01:30 PM IST

Auto sector bankruptcies of First Brands and Tricolor Holdings are signaling stress in the US credit market, particularly for low-income households.

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Two auto sector bankruptcies have rattled parts of the US credit market, raising concerns about a deterioration in the financial health of low-income households and migrant communities. Auto-parts maker First Brands became the latest company to unravel, filing for bankruptcy protection on Monday, following the recent bankruptcy of subprime auto lender Tricolor Holdings. While both companies had idiosyncratic reasons for their collapse, they have stoked fears of broader stress. “As far as I can tell, the market appears concerned,” said Campe Goodman, a fixed income portfolio manager at Wellington Management, who said spreads on asset-backed securities (ABS) for some consumer lenders had widened significantly.

ABS allow auto lenders to package loans into tradable bonds, providing them with cash and transferring credit risk to investors.

“There are some issues that are specific to each of these two companies…that said, a lot of times these things happen in an environment where things are changing,” said Goodman. He pointed to a weakening in consumer health and policy changes that impact low-income segments of the population, such as changing immigration rules. First Brands struggled after a failed effort to refinance its debt earlier this year, which stalled when investors asked for a closer look at its books, according to two sources familiar with the matter. One of the people familiar with the matter said First Brands’ problems were exacerbated by the impact of tariffs on its business.

The collapse comes on the heels of subprime auto lender Tricolor Holdings’ bankruptcy. Tricolor’s court-appointed trustee did not immediately respond to a request for comment outside business hours. Steve Edwards, senior investment strategist at Morgan Stanley Wealth Management, said while credit markets continued to look at these instances as company-specific issues, they may reveal underlying weakness in certain segments of the consumer market.

Lower-income consumers have been impacted by high interest rates, mounting labor market weakness and tariffs, he said.

“In this context, defaults on loans for lower-income consumers should not be very surprising,” he said.

Signs of stress

Signs of strain are emerging in US credit markets tied to auto debt. Spreads on the ICE BofA AA-BBB US Fixed Rate Automobile ABS Index – a measure of the extra yield investors demand over Treasuries to hold those bonds – have widened by more than 20 basis points this month.

Still, the broader US corporate credit market – both investment grade and high yield – remain stable, with dealmaking seeing a notable uptick following the Federal Reserve’s interest rate cut. The ICE BofA US Corporate Index, a benchmark for investment-grade bonds, shows spreads have narrowed by six basis points since early September. Even riskier high-yield debt has tightened, with spreads down about 10 basis points. A sign of robust credit market is the latest leveraged buyout of videogame developer Electronic Arts, which has agreed to sell itself to a group of private investors in a deal that values the maker of “Battlefield” and “Madden NFL” at $55 billion. One Wall Street banker said there was a tale of two different economies where the richer are benefiting from home equity gains and stockmarket gains, while some of those on low incomes were under strain.Subprime stress

Auto loans are a segment of the consumer finance market that has been seeing recent stress. Rikard Bandebo, chief economist at VantageScore, which develops credit scoring models, said his firm has seen delinquency rates for auto loans continue to rise to historic highs.

“Lower-income households continue to have higher delinquency rates, but their delinquency rates have stabilized over the past year and a half, while delinquency rates at middle- and higher-income households are increasing,” Bandebo said.

Analysts said that companies such as Tricolor, with operations in six states, were exposed to trends hitting lower income workers.

Tricolor sold cars and provided auto loans mostly to low-income Hispanic communities in the Southwestern United States, saying it saw an opportunity to serve “invisible” workers with no access to bank accounts or other forms of credit.

Analysts said the low-income auto market has been hurt by affordability, as second-hand car prices soared in the aftermath of the pandemic and so did borrowing costs.

“Subprime consumers disproportionally finance used vehicles, where values remain stubbornly high following pandemic related disruptions,” said Satyan Merchant, senior vice president, automotive and mortgage business leader at consumer credit firm TransUnion.

“Beyond vehicle payments, insurance and maintenance costs have also surged faster than general inflation, placing additional strain on lower-income households with limited disposable income.”

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