While it may be a new year, the market’s affordability challenge is nothing new for auto-finance lenders. However, the forces driving it have become more complex, more persistent and more interconnected than in recent years.

Owning a car is more expensive than it was even a few years ago, and consumers are feeling the impact from multiple angles. While much of the focus remains on record-high sticker prices, the rising costs of parts and maintenance have become significant contributors to the total cost of ownership. EV subsidy changes, including the elimination of the New Clean Vehicle Credit for vehicles acquired after Sept. 30, have also contributed to pricing and demand shifts. And, ongoing supply constraints, including reduced inventory in economy segments, continue to distort the market. At the same time, auto insurance costs have climbed rapidly, creating another major pressure point on monthly budgets.

The market has moved into what many in the industry now recognize as the “$1,000 payment threshold” era. Edmunds Q4 2025 data indicates that nearly 20% of new car buyers are taking on a $1,000 monthly payment, while loan terms have also stretched significantly, with some reaching as long as 90 months.

This combination of high prices and extended terms is contributing to an increased risk profile for lenders, particularly as negative equity becomes more common. With the average price of a new vehicle now exceeding $50,000, even modest rate changes can have a meaningful impact on payment affordability, and longer terms can increase the likelihood that a borrower will be underwater for a larger portion of the loan.

While there is optimism that rates may gradually trend downward this year, financing costs remain a key contributor to affordability strain. Cox Automotive data from January 2026 shows average interest rates of approximately 8% for new vehicles and 13% for used vehicles.

This matters because higher rates not only reduce the pool of qualified buyers but also increase default risk by limiting borrowers’ monthly cash flow flexibility. For households that are already absorbing rising insurance premiums and other inflation-driven costs, there is simply less margin for error.

Today, consumer exposure looks increasingly uneven. Perhaps most telling is that for U.S. consumers earning $100,000 or more annually, the average auto loan amount is approximately $30,000. But for consumers earning less than $50,000, the average auto loan amount is about $27,000, representing more than half of their annual income.

How auto debt aligns with income is one of the most important risk indicators for lenders. Delinquency risk rises when a borrower is dedicating a large portion of income to a depreciating asset, particularly if there is a disruption such as job loss, reduced hours or unexpected expenses.

Portfolio performance data is already reflecting the strain, with the Equifax U.S. National Credit Trends Report data showing that 7.1% of subprime auto loans to consumers with credit scores below 620 were more than 60 days delinquent as of December 2025.

Auto loans tend to sit near the top of the consumer payment hierarchy, which means delinquency trends in auto often serve as an early marker of broader consumer financial stress. Even if overall origination volume remains healthy, proactive risk monitoring is especially important for lenders this year.

In response to affordability pressure, consumer behavior is evolving in ways that have direct implications for lender strategy, including:

  1. More consumers are choosing used vehicles over new, which alters the risk profile of loans, given that used vehicles can carry different depreciation curves, collateral values and pricing volatility.
  2. Consumers are increasingly looking to refinance existing loans to reduce monthly payments.
  3. Leasing has become more attractive as consumers search for payment relief, with lease originations up 9.8% year-over-year as of December 2025.

These shifts create both opportunity and operational complexity for lenders. Refinancing demand may increase, but it also puts pressure on margin and requires tighter underwriting discipline. Leasing growth can help stabilize monthly payments for consumers, but it introduces residual value risk and requires stronger portfolio analytics.

Lenders that can combine strong risk controls with flexible lending strategies to accurately assess a borrower’s ability to pay, rather than simply price risk aggressively, are better positioned to serve consumers who are being priced out of the market by more rigid models.

Overall, the outlook for auto lending in 2026 is cautiously optimistic. Interest rates are expected to decline further, which could help unlock demand and improve affordability at the margin. Additionally, tax refund season is historically a driver for auto sales, and this year many Americans may see higher-than-average refunds due to the One Big Beautiful Bill Act (OBBA) of 2025.

Still, improving macro conditions should not be mistaken for a return to the pre-2020 auto lending environment. Between rising costs and changing consumer debt-to-income dynamics, auto lenders should prioritize balancing growth with discipline this year. Success in 2026 will be shaped by expanded access, tightened risk controls and operational capabilities critical to capturing volume and sustaining long-term portfolio health.

Will Holleman is vice president, sales, and Barrett Teague is vice president of sales, auto lending at Equifax.