In its latest edition of FED Notes, the Board of Governors of the Federal Reserve System (Fed) focuses on how the Buy Here Pay Here (BHPH) auto sector is drawing renewed scrutiny following the 2025 bankruptcy of Tricolor and related fraud allegations. A recent analysis of consumer credit and bank lending data highlights both the growing role and rising risks associated with the BHPH business model. The report highlights how unlike traditional dealerships that rely on third-party lenders, BHPH dealers finance vehicle purchases directly for consumers and serves borrowers who may not otherwise qualify for conventional financing. Fed researchers found that nearly 78% of BHPH lending volume goes to subprime borrowers, compared to just 27% for traditional auto lenders. However, the study notes that BHPH dealers have gradually expanded into less risky customer segments in recent years.
To offset elevated credit risk, the study discusses how BHPH dealers typically charge higher interest rates and often require a more frequent payment schedule than the typical monthly plan found at dealerships that work with outside lenders and consumers with better credit histories. The study also found that BHPH dealers rely on repossessions as a loss mitigation strategy, with repossession rates more than 16 times higher than traditional lenders.
“The findings affirm what NIADA members have long understood about their role: BHPH dealers serve customers who, in the Fed’s own words, ‘would likely have had difficulty accessing credit from banks, credit unions, or captive finance companies.’ For millions of working Americans — those rebuilding credit, those with thin credit files, and those whose circumstances don’t fit a conventional underwriting box — independent dealers are often the only path to the reliable transportation that makes employment, childcare, and medical care possible,” said Jeff Martin, NIADA’s Chief Executive Officer. “NIADA welcomes continued engagement with regulators, researchers, and policymakers as the sector evolves. We share the Fed’s interest in a healthy, well-functioning subprime auto market. Our members built it, and they are committed to getting it right.”
Although BHPH dealers represent only a small share of the overall $1.6 trillion auto loan market, the report notes that the sector has expanded rapidly, with loan balances increasing more than 200% since 2018. Large banks continue to provide financing to many BHPH operators through inventory financing, working capital loans, and receivable-backed lending facilities. Fed researchers also found that banks historically viewed these loans as relatively low risk because of structural protections such as over-collateralization, loan guarantees, and special purpose entities. However, bank risk assessments have worsened significantly following Tricolor’s collapse, signaling growing caution toward the sector. The report concludes that continued monitoring of BHPH lending practices and bank exposure is increasingly important as regulatory and public scrutiny intensifies.
