A company that provides auto loans to families with poor or no credit has filed for bankruptcy. 

Tricolor Holdings, a company based in Dallas that specializes in car repairs and financing, has declared Chapter 7 bankruptcy, which involves liquidating assets. This generally indicates that the company will soon cease operations.

This situation serves as a cautionary tale for the American economy, highlighting that people are amassing significant debt to maintain their vehicles, with a record number unable to meet payment obligations.

Prior to this development, Tricolor offered auto loans specifically to customers in the Southwest who had poor or nonexistent credit. Companies that issue such high-risk loans to credit-challenged individuals are known as subprime lenders.

It was the seventh-largest independent used-car retailer in the US. 

According to social media posts, customers reported getting older cars with finance rates that were twice the national used auto loan average of ten percent.

‘I got a loan from them for a 2017 Hyundai Elantra,’ one shopper said in 2023, saying his APR was 22 percent. 

‘I returned the car even though I’m going to get bad credit, but I’d prefer to end the stress from the payments.’

America’s seventh largest independent used car retailer has gone bankrupt

Last year, Tricolor issued more than $1 billion in auto loans, many to borrowers without legal documentation in the US, making its assets high-risk, according to a Kroll Bond Rating Agency report. 

According to its LinkedIn page, Tricolor ‘utilises advanced data analytics and technology to advance financial inclusion to a highly underserved Hispanic market.’ 

In the past three days, a trickle of reports forecast the company’s decline: Tricolor furloughed most of its staff across Texas, Arizona, and California on Tuesday. 

Tricolor also shut down its website. Some executives have deactivated their LinkedIn pages.  

The company’s collapse adds risk to some of the world’s largest banks. 

JPMorgan Chase, Fifth Third Bancorp, and Barclays are reportedly bracing for potentially hundreds of millions of dollars in losses tied to Tricolor loans, according to Bloomberg.

And one bank is are crying foul: Fifth Third reported a single payment of $200 million that’s ‘alleged external fraudulent activity.’

The bank said its ‘working with the appropriate law enforcement authorities in connection with this matter.’ 

Tricolor holdings refurbished and sold cars with a subprime model – its target consumer was largely spanish-speaking 

Sources familiar with the matter say the payment came from the car lender, according to the Financial Times. 

Car payment worries 

The company’s bankruptcy comes as American car bills are becoming too expensive for most US drivers. 

In August, Americans spent an average of nearly $50,000 to roll a new car off a dealership lot, an $11,000 increase since the same month 2019.

The car dealer’s CEO, Daniel Chu, has led the company since 2007

That ballooning price has saddled Americans with a huge amount of debt. Experts warn the Daily Mail the crisis is starting to resemble bubbles that burst in 2008. 

‘Families are currently in an economic pressure cooker,’ Erin Witte, director of consumer protection at Consumer Federation of America, said. 

‘Expensive car loans are rapidly jeopardizing their ability to avoid disastrous outcomes like delinquency and repossession.’ 

Last year, the country racked up a $1.66 trillion auto bill, passing student loans as the heaviest amount of US debt. Only home mortgages outpaced auto loans last year. 

Auto debt has seen a 20 percent increase since 2020.  

More than 5.1 percent of debt holders are falling behind on their payments, according to LendingTree. 

‘When auto loan delinquencies are rising, it’s a likely sign that people are struggling,’ Matt Schulz, a chief consumer finance analyst for LendingTree, said. 

‘That’s no great surprise, given stubborn inflation, high interest rates and general economic uncertainty.’