The September collapse of Tricolor, a Texas-based subprime auto lender and used-car retailer, has sparked renewed scrutiny of the consumer credit market. Investors are questioning whether the company’s bankruptcy filing was an isolated incident or a symptom of deeper vulnerabilities across the sector.
However, macroeconomic and industry data show that U.S. consumption and consumer credit remain resilient, due to the financial strength of higher-income groups.
“Only a sharp rise in unemployment or a major equity market correction—neither of which is in our base-case scenario—could trigger a broader deterioration in the consumer credit cycle,” says Vishwanath Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist.
Despite the solid data, banks have ramped up audits across subprime auto deals and other consumer credit segments to assess potential risks in response to the Tricolor collapse.
“Further reviews may be needed to fully restore confidence in underwriting and servicing practices,” says Tirupattur. “Until these concerns are resolved, investor sentiment in subprime auto will likely remain weak.”
Pockets of Concern
Third-quarter earnings from major banks and broader economic data paint a fairly reassuring picture of the full landscape of consumer credit. Consumer delinquencies across regional, specialty, and large lenders have performed better than analysts expected, indicating that portfolio quality remains solid. Banks saw loan growth of around 6% to 8% on an annual basis in the past quarter and issued optimistic guidance. Mortgage delinquencies are also trending lower, thanks to stricter lending standards.
“Rather than seeing a deterioration of credit, we're seeing a normalization of credit,” says Ryan Kenny, equity analyst on Morgan Stanley’s large cap banks research team. “That said, large banks mostly lend to prime consumers with high FICO scores. Although they’re not identifying any issues in that cohort, there are areas of concern among lower-income borrowers.”
In particular, data from the asset-backed securities (ABS) market reveals a sharp divide in consumer credit performance.
The prime segment shows resilience, with declining delinquencies, lower-than-expected defaults, and improving cure rates—the pace at which loans return to performing from delinquency.
In contrast, subprime borrowers are showing signs of stress. Delinquencies in subprime auto loans are near record highs, while lending standards in that segment have loosened.
This divide mirrors broader economic disparities among Americans. High-income households, which account for roughly 40% of U.S. personal consumption, remain on a solid footing: They continue to benefit from strong wage growth, suffer minimal impact from tariff-driven inflation, and are posting robust net worth gains from housing and equities. These households are predominantly prime borrowers.
Meanwhile, lower-income households—often subprime borrowers—face a different reality: They are facing slowing wage growth, while their exposure to financial assets are minimal. The bottom 40% of U.S. households hold only 7.4% of the country’s total net worth; 70% is concentrated among the top 20% of households.
“The strength of upper-income consumers explains why the consumer in aggregate remains relatively healthy,” says Morgan Stanley Global Economist Arunima Sinha. “However, those at the lower end of the income and credit spectrum will likely continue to suffer from slower job growth and greater exposure to inflationary pressures, including tariffs.”
Sinha expects U.S. consumption to grow in the fourth quarter, albeit at a slower pace, driven primarily by upper-income cohorts.
“We don't see the economy and consumption going to into a recession, given the resilience of upper-income cohorts,” Sinha says.
Government Shutdown Hits SNAP Recipients
Adding to the pressure on low-income households, approximately 42 million Americans lost access to Supplemental Nutrition Assistance Program (SNAP) benefits on November 1 due to the government shutdown that began October 1. It marks the first suspension of food assistance since SNAP’s inception in 1964.
The delay in $8 billion in payments could result in significant declines in November personal income and spending. Morgan Stanley Research estimates a drop of 0.4% in the U.S. nominal income for the month if no benefits are paid.
“This would affect lower-income consumers most,” says Morgan Stanley U.S. Economist Heather Berger. “The longer the delay lasts, the larger we expect the spending effects would be, even if benefits are paid retroactively.”
Government data show that SNAP recipients spend around 96% of the benefits within one month of issuance, with over half spent within the first week.
“Spending effects could be reduced if consumers are able to borrow to make up for the temporary decline in income,” Berger says. “But limited access to credit remains a challenge for low-income households.”
