The last time the U.S. placed a tariff on vehicles was in the 1960s, and the target was imported pickups (in response to European tariffs on our poultry). So, as Cox Automotive chief economist Jonathan Smoke says, “There’s really not a great recipe for how to get around this.”
This is an especially uncertain time for the American car buyer. In addition to tariffs and the supply chain snafus they may cause, stagnant auto loan interest rates are among other factors exacerbating affordability concerns. Bankrate interviewed Smoke, Experian head of automotive insights Melinda Zabritski, and TransUnion senior vice president Satyan Merchant to discuss where we go from here.
Almost in unison, these experts told us: Buckle up. Or, as Smoke puts it: “The rollercoaster has started its ride.”
These interviews have been edited for length and clarity.
What are the immediate effects of tariffs on car buyers?
For one, higher prices. The most economical cars could jump in cost by $2,500 to $4,500, according to Anderson Economic Group’s early April analysis. And that’s just for American-made models.
The tariffs’ effects could also echo the Covid-19-era used car market (remember the microchip shortage?). As Zabritski says, “If we’ve got very tight inventory for new [cars] and very high prices on new [cars], that’ll increase demand for used cars, which will increase the prices … just like we saw in 2021.”
In the short term, the clock is essentially ticking for the inventory of imported vehicles that were already here in the U.S. And so there’s a rush happening right now for people to buy those vehicles. That inventory is probably going to run out by sometime in May… The bad news is, if you’re in the market for a new vehicle, you’re going to be paying more. But it means if you already own a vehicle, it’s going to hold its value a bit more. So, for somebody trying to trade up, it’s probably a wash.
— Jonathan Smoke, Cox Automotive Chief Economist
Certainly, the cost of the vehicle can go up… and we’re hearing how the manufacturers are trying to mitigate some of that. Some have announced that they’re absorbing the cost of any sort of tariff increase, and not necessarily increasing the [buyer’s] cost, as they see affordability as a challenge. But an important point on the tariffs could be that it’s not just the finished product, the new vehicle — it’s, ‘Hey, I have a used vehicle today, and I have to go in for a repair.’ And all of a sudden, that part that I need to replace is subject to tariffs, right?’ And so that continues to drive the pinch on affordability and overall cost for a consumer.
— Satyan Merchant, TransUnion Senior Vice President
How easy (or hard) will it be for auto loan applicants to get approved?
Some might say there’s a lender for every car buyer, but try telling that to someone who was just rejected for a loan. They might be sitting right next to you: The percentage of auto loan applications that failed to gain approval hit an 11-year high last summer and hasn’t meaningfully decreased since, according to Federal Reserve Bank of New York data.
That’s apparent in TransUnion’s figures, too: The number of new loans given to borrowers with sub-super prime credit scores (below 781) shrank, albeit modestly, for the year up to September 2024. Will lenders loosen up in 2025?
In the used-car space, which is still over half of [the] finance [market], your subprime finance companies are around 16% of that space. So, consumers across a wide variety of credit [tiers] can usually find a lender who is willing to fund them. Now, it may be at higher rates because the risk is higher, but there’s definitely a broad variety of lenders that operate in this space.
— Melinda Zabritski, Experian Head of Automotive Insights
Smoke: We publish an index in partnership with Moody’s Analytics every month, where we look at the terms on loans, and we judge through the eyes of the consumer, ‘Is it more challenging and more expensive, or is it easier and less expensive?’ And it has been improving for most of the last several months: The overall conditions have been better, you’re more likely to get approved, you’re more likely to see a little bit more flexible terms.
Merchant: It’s also a time where even for [lenders], things are not controllable that make the affordability challenging for those consumers. So, a consumer may be on the low end of the risk spectrum, looking to finance a used vehicle. And it may not even necessarily be the lender tightening their credit box as much as it is the only available used vehicle in that market might be out of the price range.
When will auto loan interest rates descend?
This question depends on the answers to other questions posed by our experts, including:
- If lenders’ “books” start to improve (as a result of existing borrowers catching up on their loan payments, perhaps thanks to tax refund season), will they have a greater appetite for risk?
- Will consumers’ situation improve, given the stable labor market, or are we headed toward increasing inflation, perhaps even a recession?
- How fast will new and used vehicle prices (and values) rise?
But wanting to know when auto loan rates will drop — and where rates stand today — is what you should be asking. Here’s how they responded:
Smoke: It’s within the realm of possibility [over] the next few months for us to get back to the rates that we had in December, which would be about a full percentage point lower than we’re seeing right now. And [consider] that every roughly one-percentage-point decline with today’s typical loan terms produces about a three percent decline in the monthly payment. So, it certainly helps to see those rates come down.
Zabritski: Obviously, it’s very much tied to what the Fed does. And we’ve already had the signals that we don’t have rate decreases coming. However, that doesn’t necessarily mean that a consumer can’t get a good rate, especially if they’re looking for new cars, have prime credit and happen to be shopping for a car where a manufacturer is running an incentive. Other than that… until the cost of funds goes down, we’re not going to see those rates come down for auto buyers.
What should we know about the electric vehicle market?
Electric vehicle (EV) sales increased by 10 percent in the first quarter of 2025 compared to the year prior, according to Cox Automotive. But the growth of EV leasing may be the bigger story, as Experian and TransUnion’s data (below) illustrates:
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Source: TransUnion
Whether you’re considering buying or leasing, taking advantage of federal and state tax credits can lessen the effect on your budget.
Zabritski: For Q4 [2024], half of the EVs that were purchased were leased… You can really see the impact of that tax credit when you look at the monthly payment between consumers who leased an EV versus those that got a loan. And in some cases, the payment difference is hundreds and hundreds of dollars. So, it’s certainly made those vehicles much more affordable to a broader audience.
Smoke: There’s going to be a time when we have an expiration, we think, because of the [Trump] administration wanting to reduce or eliminate the [Inflation Reduction Act] tax credit. So, we think there’s a window where leasing of EVs may get even more aggressive as people try to get in front of when that’s going to happen. We likely have several more months, but I do agree that leasing could be a positive way to address some of the affordability [concerns].
Merchant: The industry is starting to have much more used EV supply than even a few years ago. We’ve heard from the dealer community and the lender community… that they’re seeing… growth in financing of used EVs. It’s still a nascent market, but it’s a market that does offer some deals for consumers, where they could manage that monthly payment: If the retail price or the price that they’re paying for that used vehicle that’s an EV might be lower than a comparable [internal combustion engine] vehicle.
Given these market trends, how should car buyers measure affordability?
You might have heard of the 20/4/10 rule of car-buying and borrowing: Insulate your budget by making a 20 percent down payment, choosing a four-year repayment term (or shorter) and dedicating no more than 10 percent of your monthly income to transportation costs.
The question is whether that adage is out of date. After all, auto loan delinquencies may still be climbing, according to a February New York Federal Reserve report.
And new car buyers and borrowers might be attempting to stave off delinquency by fudging the 20/4/10 numbers. In fact, one in every five car buyers is now opting for a seven-year term, according to an April Edmunds survey. And Smoke says that his data points to an average term closer to six years and an average down payment of nearly 10 percent: “Clearly, the average new vehicle is close to $50,000, so it makes sense that it’s a little harder to come up with 20%.”
Smoke: And so [trying] to do a four-year loan without putting 20% or more down is creating a monthly payment that, for at least an average household, would be really challenging to do. And especially at today’s rates… The 10-percent-of-income [rule] is still a very worthy target. The reality is, if you’re a typical household [and] you don’t stay within that 10 percent, you’re setting yourself up for challenging times if you have to take on other debt or you have unplanned expenses that come along.
Zabritski: It’s definitely useful for car buyers to still keep in mind what they’re able to afford on a monthly payment basis. And if it doesn’t fit [with] perhaps that new car, maybe it’s a late model, maybe it’s a five-to-six year old vehicle because certainly cars are lasting longer. Just because a vehicle is nine, 10 years old doesn’t mean it’s not going to be on the road for another five, six, seven, eight years. And it doesn’t mean you won’t be able to find financing on it.
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