It is understood to have cut its ties with 300 to 400 used car dealers, leaving borrowers with poor credit ratings to choose between its 12 own-brand dealerships.
The move came as its stock exchange listed parent, Cattles Group, announced a £200 million rights issue to bolster its reserves.
A motor industry finance expert, who asked not to be named, told AM: “Quite major specialists who use Welcome, for example Carcraft, will really struggle.
I think quite a few of those specialist sub-prime dealers will cease to trade.
“Without access to money to lend, some will not be able to continue.
The only other major sub-prime lender left is British Credit Trust in Slough.
But it will not have enough money to go round everyone,” he said.
Welcome’s withdrawal might see a poorer quality car influx in the market, he said.
“More used cars will come into the market, which might also have a slight impact on residual values.”
However, his view was not shared by Professor Garel Rhys, director of automotive industry research at Cardiff University, who does not think the move will instantly affect dealerships.
He said: “There are still lots of people prepared to lend sub-prime to dealers.
There isn’t the degree of sub-prime lending in the automotive sector compared to other sectors – yet.
“But ultimately, the actions of Welcome Car Finance will have a knock-on effect.
So while there are plenty of people prepared to lend at the moment, in the coming months I think that will change.”
Rhys added: “The auto sector is not immune to what is happening in the market.
I think Welcome’s decision will reinforce the underlying weaknesses – decline in sales and people’s reluctance to buy.”
Welcome Car Finance declined to answer AM’s questions.
It has stated that it wants to be more efficient and to concentrate on the most profitable business.
In a recent finance provider study, it was repeatedly criticised by dealers over slow payments and poor efficiency and service.
According to its 2007 financial report, Welcome Car Finance’s income grew by 76% to £106 million last year, as it raised its sales from 9,000 units in 2006 to 13,800 in 2007.
It also opened its 12th site at Luton. The average value of its hire purchase agreements is £6,000.
Despite the credit crunch, it predicted growth in the sub-prime sector, which already accounts for a fifth of UK motor finance.
Customers of Welcome Car Finance are primarily socio- economic groups C and D, which make up 65% of the UK adult population.