Widespread financial uncertainty has made debt buyers much less keen to purchase the bonds these nontraditional lenders subject. Increased rates of interest, courtesy of the Federal Reserve, have given buyers different enticing choices.

Now, these finance firms are paying as a lot as 4 instances what they paid in January to borrow in bond markets the money they lend to clients. Loads of them are struggling to make that math work. As soon as-highflying consumer-finance firms comparable to

Pagaya Applied sciences

have flipped from revenue to loss. Some smaller outfits are shutting down altogether.

Lots of the nontraditional lenders launched throughout the previous decade, which implies they’ve by no means weathered a sustained interval of excessive rates of interest.

“All of those fintech corporations speak about their knowledge science and machine studying capabilities, however the fact is, their fashions haven’t been battle examined via a recession but,” stated Reggie Smith,

JPMorgan Chase

& Co.’s lead fintech inventory analyst.

Pagaya and different startups comparable to

Affirm Holdings Inc.

and

Carvana Co.

aren’t banks, which implies they’ll’t take deposits for funding. For debtors with imperfect credit score, these different lenders are generally the one option to get an auto mortgage, mortgage or buy-now-pay-later supply.

The businesses at the moment are lending much less or charging extra for loans they do make, including to considerations already swirling in regards to the well being of the economic system.

Athas Capital Group, an alternate mortgage lender in Calabasas Hills, Calif., introduced its closure in November, citing the poor outlook for promoting its loans to Wall Road corporations.

“Do I set a bunch of money on hearth to stay round or do I shut store?” requested

Brian O’Shaughnessy,

co-chief government officer. “We selected, proper or fallacious, to shut up store.”

He’s now making an attempt to assist his roughly 265 workers discover jobs at competing corporations.

The common value of bonds backed by private-label mortgages lately fell to about 82 cents on the greenback, their lowest stage since not less than 2011, in accordance with a Wall Road Journal evaluation of information from the Monetary Business Regulatory Authority. Bond costs sometimes fall when rates of interest rise and buyers demand increased yields to lend cash.

Gross sales of the bonds constituted of private-label mortgages, which don’t profit from federal ensures, boomed final yr when Treasury bonds had been paying peanuts.

Usually, loans from different lenders are bundled into securities that Wall Road corporations promote to pension funds, insurers and different buyers. These bonds are often known as asset-backed securities, or ABS, and they’re sometimes offered to buyers in a number of slices which have totally different yields based mostly on their danger.

The securitization course of is integral to retaining many consumer-finance firms in enterprise, however it may possibly amplify market gyrations in sudden methods. Costs of collateralized mortgage obligations, or CLOs—a kind of ABS—gapped under truthful worth in October when U.Ok. insurers and pensions responded to rising rates of interest by dumping CLO bonds.

Some buyers have stopped shopping for ABS, which they nonetheless affiliate with the 2008 monetary disaster, to scale back danger. Others are promoting out of concern that the loans backing the bonds would possibly go unhealthy. Residence costs are already falling in lots of U.S. cities, and delinquencies are creeping up on auto and different client loans.

The most important change, although, is that insurance coverage firms and pension funds have scaled again their curiosity in ABS, stated Wealthy Barnett, a accomplice at investing agency Castlelake LP. Rising rates of interest have lifted the yields on company bonds and Treasury bonds, making them enticing for the primary time in years.

Prudential Monetary Inc.

has slowed once-brisk purchases of ABS and CLOs in its roughly $400 billion insurance coverage account. As a substitute, it’s snapping up high-rated company bonds as a result of their yields have risen, socking them away in preparation for when the Fed begins reducing charges once more, chief funding officer

Timothy Schmidt

stated.

Funding-grade company bond yields doubled this yr to a 13-year excessive of about 5%, which is near the roughly 7% return many pensions and insurers shoot for. One other profit: Company bonds have longer phrases than most ABS, making them higher matches to offset the payout schedules of insurance coverage and pension liabilities.

“We’ll look again on the belongings we’re shopping for now as fairly enticing,” Mr. Schmidt stated. “I don’t assume anybody anticipated charges to maneuver this far this rapidly.”

Buyers nonetheless keen to purchase the bonds are making debtors pay up. Affirm, a buy-now-pay-later firm, deserted plans to subject a $350 million bond in November when buyers demanded increased yields than it was keen to pay, individuals acquainted with the matter stated. The corporate additionally funds loans via financial institution credit score traces and direct gross sales to buyers such because the Canada Pension Plan Funding Board.

Pagaya, a technology-driven client finance firm, went forward with a $543 million bond final month however needed to pay buyers an 8.1% rate of interest on its best-quality bonds to get the deal performed, in accordance with knowledge from Finsight. That marks a steep enhance from the 6.1% price it bought on comparable bonds offered in August and a pair of% on a deal in January.

Issuance of consumer-loan ABS declined barely this yr, however Pagaya has practically doubled bond gross sales to about $3 billion, in accordance with Finsight. Charges from bond gross sales account for a lot of the corporate’s income, in accordance with its monetary filings.

On the identical time, delinquencies have risen on loans bundled into ABS that Pagaya offered. A bond the corporate issued in January at 100 cents on the greenback traded in mid-November at round 88 cents, in accordance with knowledge from Empirasign.

Pagaya has been shopping for loans with tighter underwriting requirements this yr, and its November bond issuance exhibits that bond buyers belief the corporate’s artificial-intelligence methodology, its 34-year-old co-founder

Gal Krubiner

stated. The U.S. and Israeli agency makes use of AI to determine enticing loans that different lenders would flip down, Mr. Krubiner stated.

“We noticed the uncertainty and volatility coming,” he added.

Pagaya’s inventory is buying and selling under $1, down from about $10 three months in the past.

Carvana, a web based auto vendor, is dealing with a money crunch. Its shares, which soared within the pandemic, have misplaced 98% of their worth this yr. The corporate lately employed restructuring advisers.

Asset-backed bonds of firms that go bankrupt sometimes keep away from default, however their costs can fluctuate wildly. A bond backed by auto loans that Carvana issued for 100 cents on the greenback in September 2021 traded round 75 this month, in accordance with knowledge from Empirasign. A part of that decline additionally displays the rise in total rates of interest.

For the shrinking pool of buyers out there, the yields have not often been increased.

Subprime auto lender Flagship Credit score Acceptance LLC did a roughly $400 million bond deal in late October. The riskiest chunk of its bonds, which had a double-B ranking from some businesses, had a variety of 9 share factors over going charges.

No comparable subprime auto bond had ever priced with such a large unfold since not less than the final monetary disaster, in accordance with John Kerschner, U.S. head of securitized merchandise at Janus Henderson Buyers. Buyers who purchased the debt obtained a yield of over 13%, in accordance with Finsight.

“It very a lot feels such as you’re getting paid for the chance proper now—after which some, fairly frankly,” stated Mr. Kerschner, who has been investing broadly in ABS.

Write to Matt Wirz at matthieu.wirz@wsj.com, Ben Eisen at ben.eisen@wsj.com and Tom McGinty at Tom.McGinty@wsj.com