Industry analysts predict a turbulent journey for the auto loan sector: Expert insights into upcoming market fluctuations.
Buckle up, shmuck! Here we go, riding the unpredictable rollercoaster of the auto industry.
It's been a while since the U.S. slapped tariffs on imported motorized chariots, and that was in the 60s, with pickups being the target (probably in retaliation to Europe's taxing of our poultry). According to Cox Automotive's economic guru, Jonathan Smoke, there aren't many strategies to get around this tariff conundrum.
With the current climate for the American automotive consumer, things are looking grim. Not only do car buyers have to deal with tariffs and potential supply chain nightmares they might cause, but stagnant auto loan interest rates are adding fuel to the affordability fire. We spoke to Smoke, Melinda Zabritski from Experian, and Satyan Merchant from TransUnion to find out where we stand.
Feel the Sting: Immediate Effects of Tariffs
Guess who's paying for those import taxes? That would be you, the consumer. The average cost of the most cost-effective motorized carriages could skyrocket by $2,500 to $4,500 just for domestically manufactured models. And that's just the beginning.
Tariffs could bring back some of the chaos we saw in the used car market during the COVID-19 era, remember the microchip fiasco? Zabritski explains, "If we've got limited stocks of new fancy cars with sky-high prices, that'll only accelerate the demand for used cars, ultimately jacking up their costs."
In the short term, the available inventory of imported vehicles already in the U.S. is sort of like a ticking time bomb. A rush is happening right now as folks snatch up those motorized chariots before they all disappear by May. So, if you've been eyeing a new set of wheels, be ready to shell out more cash. However, if you already own a motorized carriage, you might be sitting pretty as your vehicle could hold its value a bit longer.
- Jonathan Smoke, Cox Automotive Chief Economist
The Downside: Loan Approval Trouble
They might tell you there's a lender willing to fork over cash for every car buyer, but taking a gander at those rejected for loans might convince otherwise. During the summer of 2023, the percentage of auto loan applications that got denied hit an 11-year high. Will lenders start to loosen up in 2025?
In the realm of used cars, accounting for half of the finance market, there's still room for subprime finance companies. So, consumers with less-than-stellar credit scores can typically find a lender ready to foot the bill. The deal may come with higher rates since the risk is higher, but there's a decent variety of lenders ready to do business in this space.
Experts suggest that still-tight inventory of new motorized carriages, coupled with high prices, will drive demand for used vehicles, causing their costs to balloon further.
When Will Auto Loan Interest Rates Sink?
The question everyone wants to know is: When will auto loan rates drop, and where do they stand right now? Smoke predicts we could see interest rates return to the levels we witnessed in December, roughly a full percentage point lower than what we're seeing now. For reference, a one-percentage-point decline in today's typical loan terms could lead to a decrease in monthly payments by about three percent. That's good news for those eagerly awaiting a dip in payments.
However, Zabritski isn't too optimistic about seeing auto loan interest rates drop in the near future. "Rate decreases aren't on the horizon, but that doesn't preclude consumers from securing a good deal, especially if they're in the market for new cars with prime credit and happen to be shopping for a ride where the manufacturer is offering incentives."
The Electric Vehicle Scene
Despite a ten percent surge in electric vehicle sales year over year during the first quarter of 2025, experts agree that the growth of EV leasing is the big story. TransUnion and Experian data reveal that 50 percent of electric vehicles purchased in Q4 2024 were leased, as the tax credit impacted monthly payments significantly.
Leasing EVs could be a smart move for those eager to ditch gas-guzzling motorized chariots before federal tax credits possibly expire. Merchant notes the rapid growth of used EV financing, even in the nascent stage, offering some deals for money-conscious consumers.
Say Goodbye to the 20/4/10 Rule?
The 20/4/10 rule of car buying and borrowing, recommending a twenty percent down payment, a four-year repayment term, and allocating no more than ten percent of your monthly income to transportation costs, might be a thing of the past. Smoke observes that new car buyers and borrowers are trying to stave off delinquency by stretching out loan terms, with one in five car buyers opting for a seven-year term.
The experts suggest that car buyers and borrowers should adjust their expectations according to their current financial situation. Instead of focusing on traditional guidelines, it might be beneficial to consider the overall affordability of the motorized chariot and work from there.
These interviews have been edited for length and clarity.
- Jonathan Smoke, Cox Automotive's Chief Economist, suggests that auto loan rates could return to levels seen in December, which are roughly a full percentage point lower than current rates.
- In the used car market, subprime finance companies are still available for consumers with less-than-stellar credit scores, though the deals may come with higher rates due to the risk inherent in such loans.
- Experts predict that tight inventory and high prices will drive demand for used vehicles, causing their costs to balloon further.
- In Q4 2024, 50 percent of electric vehicles purchased were leased, according to TransUnion and Experian data, indicating a growing trend in EV leasing.
- The 20/4/10 rule of car buying and borrowing, which recommends a twenty percent down payment, a four-year repayment term, and allocating no more than ten percent of monthly income to transportation costs, might become obsolete as car buyers and borrowers opt for longer loan terms to stave off delinquency.
