Carvana’s Subprime Loan Exposure and Accounting Practices Pose Unacceptable Risk for Long-Term Investors

In the aftermath of the 2008 financial crisis, investors learned that opaque credit practices and lax underwriting standards could unravel even the most seemingly robust business models. Today, Carvana Co. (CVNA) appears to be repeating history. The company’s reliance on a subprime auto loan portfolio, coupled with accounting practices that obscure its true financial health, creates a toxic mix of credit risk and governance failures. For long-term investors, these issues represent an unacceptable threat to capital preservation.

Credit Risk: A House of Cards Built on Subprime Loans

Carvana’s business model hinges on the sale of subprime and deep subprime auto loans, a segment of the market notorious for its volatility. According to a report by Hindenburg Research, over 44% of the loans sold in Carvana’s asset-backed securities (ABS) deals in 2024 were non-prime, with more than 80% of these deals having weighted average FICO scores in the “deep subprime” range [1]. This is not merely a statistical anomaly; it reflects a systemic underwriting failure. A former Carvana director reportedly stated the company “approved 100% of applicants,” a practice that starkly contrasts with industry norms [1].

The consequences of this lax approach are already materializing. Carvana’s subprime loan delinquency rates are four times the industry average for so-called “prime” borrowers and have surged further in 2024 [1]. To mask these delinquencies, the company has increasingly granted loan extensions—a practice facilitated by its loan servicer, a private dealership run by the CEO’s father [1]. While extensions temporarily delay defaults, they merely postpone the inevitable. As S&P data reveals, Carvana’s subprime loans have seen the highest increase in extensions among subprime auto issuers, a trend that signals deteriorating credit quality [2].

Corporate Governance: A Web of Related-Party Dealing

Carvana’s accounting practices further exacerbate its risks. The company has engaged in opaque related-party transactions to inflate financial results. For instance, in Q2 and Q3 2024, Carvana sold $800 million in loans to an “unrelated third party” suspected to be a trust affiliated with Cerberus Capital, a firm with ties to Carvana director Dan Quayle [1]. These sales accounted for 18.3% and 16.3% of total loan sales in those quarters, respectively [1]. Such dealings raise questions about whether Carvana’s financial disclosures reflect arm’s-length pricing or are designed to manipulate earnings.

Even more troubling is the company’s relationship with DriveTime, a private dealership owned by the CEO’s father. Carvana sells cars and loans to DriveTime at favorable terms, a practice that a senior finance manager described as artificially inflating warranty revenue by 58% per sale [3]. These transactions, while not explicitly illegal, create conflicts of interest and erode transparency. As one former director noted, such dealings are “kind of like Fight Club… there’s certain things we don’t talk about” [1].

The Illusion of Profitability

Carvana’s recent financial results—$4.84 billion in Q2 2025 revenue and $308 million in net income—appear impressive at first glance [1]. However, nearly 26% of its gross profit historically derives from the sale of subprime loans [1]. These sales have generated gains exceeding 2.2 times the company’s net income in the past nine months [1]. Such accounting gymnastics suggest that Carvana’s profitability is heavily dependent on the secondary market for risky assets, a strategy that becomes untenable if credit conditions tighten or investor appetite for subprime ABS wanes.

Conclusion: A Recipe for Disaster

For long-term investors, Carvana’s combination of high-risk lending and governance lapses is a red flag. The company’s subprime loan portfolio is a ticking time bomb, and its accounting practices obscure the true scale of its exposure. While Carvana has dismissed recent allegations as “intentionally misleading” [2], the data tells a different story. In an era where credit cycles are unpredictable and regulatory scrutiny is intensifying, Carvana’s model is unsustainable. Investors would be wise to avoid this stock until the company addresses its structural weaknesses—or risk becoming the next chapter in the annals of financial misadventure.

**Source:[1] Carvana: A Father-Son Accounting Grift For The Ages, [https://hindenburgresearch.com/carvana/][2] Carvana accused of shady practices in Hindenburg report, [https://news.dealershipguy.com/p/carvana-accused-of-shady-practices-in-hidenburg-report-2025-01-03][3] Carvana - DD from a Senior Finance Manager, [https://www.reddit.com/r/wallstreetbets/comments/1i5wk8e/carvana_dd_from_a_senior_finance_manaer/]