Carvana plunges as investors respond to another subprime lender’s bankruptcy filing

Used car retailer Carvana is plunging on Wednesday, with the stock on pace for its worst day since auto tariffs took effect in April.

Likely spooking investors is a fresh bankruptcy filing by PrimaLend, which specializes in financing for dealerships focused on subprime borrowers (customers with lower credit scores, typically below 600, as defined by Experian). The news follows last month’s bankruptcy filing by another subprime auto lender, Tricolor Holdings.

Carvana doesn’t appear to work directly with PrimaLend, but it does likely have significant exposure to subprime loans. According to a January report by Hindenburg Research, which was shorting Carvana, 44% of the loans Carvana packages into asset-backed securities (ABS) are classified as nonprime (601-660 credit scores). More than 80% of its recent nonprime ABS deals had average FICO scores in the “deep subprime” range, or the riskiest levels, according to the report. Carvana at the time called the report “intentionally misleading and inaccurate.”

Carvana has massive growth goals, saying earlier this year that it aims to sell 3 million retail units per year within 5 to 10 years. (Wall Street expects it to sell about 580,000 units this year.) Lower-income buyers could be a significant part of that growth.

Following Tricolor’s implosion last month, JPMorgan CEO Jamie Dimon said: “When you see one cockroach, there are probably more. Everyone should be forewarned on this one.” With investors pouring out of Carvana on Tuesday, it seems Wall Street isn’t taking that warning lightly.

There is likely also some momentum pullback baked into Carvana’s drop: the stock, which has been a favorite among retail traders, is still up 58% this year, even after Wednesday’s drop.