This post was originally published on this site.
For years, auto financing operated in a fairly predictable rhythm. Interest rates fluctuated within an acceptable range; leasing offered an affordable entry point, and customers traded vehicles like clockwork every few years. But that world is behind us. Today, the auto finance landscape tells a different story, and if we’re listening closely, what it reveals is sobering.
Today’s typical car buyers face economic pressure stacked upon more economic pressure. Their monthly budgets are challenged by elevated borrowing costs, elevated vehicle prices, elevated insurance rates, elevated fuel prices, and elevated maintenance costs. None of these trends exists in a vacuum, and together, they’ve created a storm that is battering the financial health of many American consumers. Perhaps it’s time to face that reality head-on.
A third of customers are financially vulnerable
In our latest J.D. Power research, we found that roughly one in three mass-market auto finance customers are financially vulnerable. That’s not an estimate based on credit scores, which can often misrepresent a borrower’s actual financial situation. It’s based on consumers’ own self-reported financial stress indicators: the ability to pay bills, handle short-term expenses, manage debt, and plan finances.
We ask consumers about these fundamentals, then categorize them as healthy, stressed, overextended, or vulnerable. In 2024, 35% of mass-market consumers fell into the vulnerable category. In early 2025, that number dropped slightly to 32%, but it remains worryingly high. For context, that means nearly a third of your potential customers are walking a financial tightrope every month.
In the U.S. market, we’ve grown accustomed to stable, long-term loans. Terms of 72 or even 84 months have become common for buyers simply trying to keep their monthly payments manageable. But those longer terms come with consequences. They potentially trap customers in negative equity positions longer and thus reduce dealership revisits for several years. That means less opportunity for engagement, less opportunity for trade-ins, and much more challenging deal scenarios when the consumer finally decides to buy the next vehicle.
Dealers: A warning on the leasing void
For dealers, the financial health of the consumer intersects directly with showroom dynamics and inventory turns. One of the most under-discussed consequences of this new era is the evaporation of affordable lease options. Where a few years ago customers could lease a car for $199 or $299 a month, today’s leases are often priced far higher than that and are essentially out of reach to many. The result? More customers are moving into extended-term loans, which could cause a major drop in return visits to the dealership.
With a lease, a customer will return every 24 to 36 months. A pull-ahead offer could bring them in even sooner. With an 84-month loan, that customer is likely gone for five years, unless they return early with a pile of negative equity in tow. That, of course, presents a new set of problems. Since dealers build their business models around regular trade cycles, this is anything but good news.
Refinancing: A sleeping giant
If and when borrowing costs meaningfully decline, and we define that as a 100-to-200 basis points drop, we expect to see a surge in auto refinancing. Customers who locked in long loans at 7% or 8% may suddenly have the opportunity to refinance at 5% or lower. That could translate to $50 and more off a monthly payment, and many consumers would jump at the chance. In fact, some may have entered high-rate loans during the post-COVID market with the assumption they’d refinance once rates dropped. That break hasn’t happened yet, but the demand is building.
For lenders, this shift will hit captives particularly hard. With their indirect lending model refinancing is not an option, and once those loans move off their books, they may lose the customer and the relationship.
Banks, on the other hand, have more flexibility. They can offer refinancing options or at least facilitate more direct customer outreach. But no one should mistake this flexibility for immunity. If rates drop and refinancing accelerates, everyone’s portfolios will shift, and not necessarily in ways they can control. Refinancing also presents an opportunity for customer conquest.
What leanders can do
For lenders, the real work begins at origination. Are you underwriting responsibly? Are you looking beyond credit scores to understand real debt-to-income ratios, true affordability? Because once that loan is on your books, your options narrow fast.
Repossession is a last resort and a costly one. The more sustainable path is offering financially challenged customers proactive tools to help them stay in good standing. That might mean payment extensions, due date changes, or eventual refinancing. These are tools most lenders have but need to deploy systematically. The key is to think preventively, not reactively.
Just because a customer is vulnerable doesn’t mean they’ll default. Many vulnerable customers are slow to pay, but not delinquent. These are not customers to write off. Instead, they’re customers to support, educate, and retain. A customer who makes it through a tough financial patch with your help is far more likely to stay loyal to your brand.
Increase consumer knowledge
Here’s a troubling trend: more consumers are entertaining the idea of just turning in their vehicle if they can’t make the payments. They assume, incorrectly, that doing so voids the loan or lease obligation. It doesn’t. Unless the auction covers the balance they’re still on the hook for the shortfall.
Worse, many customers aren’t aware of what negative equity even is until they’re at the dealership, ready to buy a new vehicle. To do that, they are likely to roll the debt into their next vehicle. In some cases, we’re seeing consumers who already rolled negative equity from a previous loan do it again, stacking underwater balances and inflating their loan-to-value ratios to dangerous levels.
Education is the first line of defense. Consumers need to understand what they’re signing up for not just in terms of monthly payment, but total cost of ownership: insurance, maintenance, fuel, depreciation, and resale value. Financial literacy should be a part of our industry’s core functions, and if we don’t take the necessary steps, we’ll pay for it in defaults and lost customers.
What comes next?
From an industry perspective, vulnerability isn’t skyrocketing, but it’s not fading either. If borrowing costs ease over the next 12 to 18 months, refinancing will be the pressure release valve many consumers are hoping for. But even if that happens, it won’t fix the larger issue of affordability.
In the challenging times ahead, every auto lender, OEM and dealer needs to realize financial vulnerability doesn’t make a customer disposable. In fact, in this climate, the ability to identify, support, and retain financially vulnerable customers may become your most valuable differentiator. Because those customers are not going away. They’re just waiting for someone to meet them where they are. And if you don’t, someone else will.