Cars Were Already Unaffordable Before Tariffs

Wall Street Journal

03-04-2025

President Trump's auto tariffs are about to give another boost to car prices that have already surged over the past four years.
That will be an additional burden on household budgets. One common but rough financial guideline is that the monthly payment on an auto loan should be no more than 10% of one's take-home pay. But even the average used-car payment is right around that threshold for an average American, and a new car payment is already beyond it. If tariffs raise car prices according to going estimates, a new car payment might eat up 15% of a monthly budget.
The 25% tariffs, which start getting collected Thursday, apply to foreign-made vehicles. Trump also plans to extend the tariffs to cover car parts, which stands to drive up the cost of repairs and insurance as well.
'People are at the brink of affordability,' said Jessica Caldwell, an analyst at Edmunds, an online car-shopping guide.
Some car shoppers say the tariffs are complicating their decisions at the dealership. Atlanta resident Mike Petchenik, a 45-year-old media consultant, intensified his search for a midsize SUV under $50,000 after learning about potential tariffs.
Looking to replace his aging 2009 Hyundai Santa Fe, Petchenik and his wife spent recent weekends test-driving and negotiating with dealers.
One salesperson texted him the day after he left a dealership, writing 'with the impending tariffs, we know prices will start to increase.'
Despite the pressure, the Petcheniks are holding off as they wait for more clarity on what's to come. Other shoppers, meanwhile, have gone ahead with purchases to try to get ahead of potential price increases.
'Are there going to be 25% tariffs forever? Are there going to be 25% tariffs for three more weeks?' said Bronson Argyle, a finance professor at Brigham Young University. 'That kind of uncertainty makes it very difficult for households to move forward.'
Argyle said big jumps in the cost of used cars in particular can affect many people's ability to satisfy basic needs such as getting to work. More borrowers also have been falling behind on loan payments for cars they purchased over the past few years.
It is difficult to precisely predict the tariffs' future effects on household budgets. There is uncertainty around how long they will last and how automakers will distribute their costs. But ballpark calculations based on an approximation of an average American's income show that price increases would stretch the commonly recommended 10% budget threshold for monthly car payments.
The average monthly payment on a used car was $552 in February, according to Edmunds. That works out to roughly 10% of the Bureau of Economic Analysis's February figure for annual per capita after-tax income, $65,285, divided by 12 months.
The Budget Lab at Yale University estimates that Trump's auto tariffs will raise new and used vehicle prices by 13.5% on average. A jump of that size under similar loan terms would bring the average monthly payment to about $630, or approximately 11.5% of posttax income.
For new vehicles, the tariffs would take that share from about 13.5% to just over 15%.
Price increases might not materialize immediately, since dealers stock a couple months' supply of new cars.
Although certain models are more vulnerable to tariffs based on where they and their parts are made, Caldwell said automakers would likely spread cost increases across their lineups.
'Someone buying a $25,000 car can't absorb the majority that they pass along of that tariff,' she said. 'Someone's buying an Escalade, that may look a little different.'
Some 13% of new cars cost less than $30,000 in the first quarter of 2025, down from 37% five years earlier, according to online marketplace CarGurus.
A surge in the prices of new cars would lead many drivers to look at used vehicles, Caldwell said, though they may not find as many options as usual. A chip shortage led to fewer leases of new cars in 2022, which in turn means fewer used cars coming out of three-year leases today.
'We're already at a pretty low used-vehicle supply, and you add on the additional pressure of people shifting to this market unnaturally,' said Caldwell. 'I would expect prices to go up.'
If and when car prices rise, lenders may respond by extending the duration of their loans, economists said. Consumers tend to focus more on the amount of the monthly payment than the number of months they will have to pay it, often to their financial detriment, Argyle's research has found. Lengthening auto-loan terms keeps monthly payments down.
Automakers will also likely try to absorb the costs of tariffs by raising interest rates through their subsidiaries that extend loans, said Kristine Hankins, a finance professor at the University of Kentucky.
Trump's 2018 tariffs on steel and aluminum led these captive lenders' interest rates to increase, according to a paper Hankins co-wrote.
'They're using the captive lending unit to transfer some of the costs to what we could call the less obvious price point of the financing costs,' Hankins said.
Captive lenders issued about 48% of loans for new vehicles in the fourth quarter last year, according to the most recent data from credit bureau Experian.
An interest rate from a captive lender may still turn out to be the lowest available, Hankins said, but she recommended shopping around for auto loans at banks and credit unions to get a point of comparison before heading to a dealership.
Write to Joe Pinsker at [e-mail] and Veronica Dagher at [e-mail]