The Cautionary
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Some auto lenders are bad boys

Some auto lenders are bad boys

And cost their investors billions

George Pillari
January 08, 2026

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Did you ever wonder how a lender makes money? When you borrow money for a car loan, the lender charges you an interest rate and you pay back interest and principal each month until the loan is paid off.

A lender would need to attract funds from investors, so the lender has money to make those loans. Say a lender could attract $1.0 million and pay its investors 5% every year. The lender now has a pile of cash to make loans.

The lender needs to charge a borrower a higher interest rate than the 5% it is paying for use of the money plus something to cover the lender’s costs for marketing, staff, profit, etc. If the lender charges 6% on its money, it could make a small profit, but it needs to charge more than that to cover the losses from loans that do not get paid back. (About one in every 40 loans crashes and burns.)

How a bank or lender makes money

Lending is known as a “spread business,” or one where the lender makes money on the spread, or difference, between what it pays to acquire money and what it collects from making loans.

When the lender makes a car loan, the lender effectively owns the car until it is paid off. As the lender makes more loans, it controls more cars that can be pledged to its investors, so the investors know they have security. If loans are not repaid, the lender can seize and sell the assets to pay back its investors.

When a lender consistently takes in money from investors, deploys it as loans, and collects on those loans, investors stay interested and want to keep sending the lender more money, as long as the collateral (cars, houses, etc.) is there to back up or provide security for the loans.

There is a type of loan known as a subprime loan. Subprime loans are made to people with low credit scores, past bankruptcies, and less-than-stellar financial standing. Subprime loans carry higher interest rates (a bigger spread) and include extra fees since the subprime lender needs to be compensated for the higher-than-average default rate. (About one in every 15 subprime loans crashes and burns.)

Tricolor Holdings specialized in subprime car loans. Tricolor did some bad things for a long time. Perhaps the company’s most brazen move was pledging the same collateral to multiple investors.

It also fabricated the data it sent to its lenders. Tricolor changed data in the detailed loan-by-loan spreadsheets it sent to lenders. Doing so created the impression of ongoing success at Tricolor when, in fact, the company made many bad loans and had higher default rates and bigger losses than it disclosed.

It came crashing down when a Tricolor staff member sent the “wrong” spreadsheet out to a lender. The spreadsheet showed what dismal condition the company was really in.

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As the business was collapsing, the FBI had a field day with phone taps and captured CEO Daniel Chu on tape admitting that Tricolor was finished and in the next breath ordering the finance department to pay him a $15 million bonus.

Tricolor CEO Daniel Chu

Investors in Tricolor lost almost a billion dollars as the company quickly filed for bankruptcy. And not any bankruptcy mind you. Most large companies file for chapter 11 bankruptcy protection, which gives the company time to work out deals with its creditors. For example, a lender to a company might become a large equity owner in exchange for forgiving its loans to the company,

Not the case at Tricolor. The company filed for chapter 7 bankruptcy, which is essentially an immediate liquidation of the business with any proceeds going to its investors and others owed money.

Chu and the rest of the management team are in the deep stuff. The trial is expected to start sometime this year.

Key Takeaways

The obvious sign of danger with Tricolor was the use of spreadsheets with its investors. Spreadsheets can be manipulated – easily. The lack of an integrated financial reporting system is always a red flag.
Different company, different investors, but the same story. Everybody was making money, and nobody questioned anything. And this went on for years.
It is not a bad idea to assume your phone calls are always being monitored. Between the FBI, NSA, and other government and dark agencies, your calls are probably recorded. Don’t be like Chu, save important discussions for in-person meetings.

Things I think about

Most tsunamis are formed from shifts in the Earth’s tectonic plates thousands of feet below the surface of the ocean. A tsunami wave might start out a foot high and travel at more than 500 mph. As it approaches shallower water, the wave slows and can build to a height of more than 100 feet.