Many Americans are rushing to buy cars before potential auto tariffs imposed by President Donald Trump lead to increased vehicle costs. However, facing pricey vehicles and high interest rates, consumers may struggle financially to afford these major purchases, potentially leading to debt default or cutting back on other expenses to offset loan impacts.
Those aiming to avoid auto tariffs by purchasing new cars may face unintended financial repercussions due to long loan terms and high interest rates. Trump’s introduction of a 25% auto tariff in late March has prompted a surge in new car sales in the U.S. But as consumers make these significant purchases, they may end up taking out loans with extended repayment periods and higher interest rates compared to waiting to buy a vehicle.
Even before the looming threat of Trump’s auto tariffs raising car and insurance prices, pandemic-related factors had already driven car prices up to nearly $48,000 on average, as reported by car-shopping website Edmunds. With interest rates exceeding 7%, purchasing a car often involves borrowing a substantial amount of money, according to Jessica Caldwell, Edmunds’ head of insights, speaking to Fortune.
To cope with the steep costs, Americans are opting for longer loan terms, with around 20% of car loans now spanning seven years, as per Edmunds data. The consequence for consumers is that in their rush to avoid tariff-related price hikes, they may be burdening themselves with greater financial strain.
Car dealerships are witnessing increased activity as consumers rush to secure new vehicles before tariffed cars flood the market. Hyundai and Nissan have reported significant sales increases, while light truck and SUV sales have seen strong annual rates, as indicated by the Bureau of Economic Analysis. This trend is deemed financially prudent by Kishore Kulkarni, an economics professor at the Metropolitan State University of Denver, who believes purchasing a new car to evade tariffs makes sense for many.
Despite remaining stable on a year-over-year basis according to the Bureau of Labor Statistics’ Consumer Price Index, car prices are still around $9,000 higher than pre-pandemic levels. While Trump has lessened the tariff impact by reducing taxes on certain imported auto parts, consumers should anticipate price hikes due to tariffs, as explained by Jason Miller, an associate professor at Michigan State University.
Given the slim profit margins at car dealerships, it is likely that they will pass on any increased costs to consumers, reinforcing the urgency for individuals to make car purchases sooner rather than later.
“There is no option but to increase prices. ‘Given their margins have fallen back to where they were before COVID, on absolute terms, they can essentially absorb higher costs of tariffs and not pass a good share of that onto the buyer,’ Miller told Fortune. While new car owners may avoid the hassle of tariffs, they are not free from financial risks. Suboptimal loan terms could result in an individual owing more for the car than its actual value, or negative equity, making it difficult to trade it in later. Negative equity shares increased by 0.4% in March, indicating a potential rise in default rates in the future, according to data from Cox Automotive. The uncertainty surrounding tariffs also puts dealers in a tough spot, said Caldwell of Edmunds. With doubts about how long tariffs will last, dealers may hesitate to accept trade-ins. They might purchase cars at inflated prices due to tariff-related hikes, only for the tariffs to become irrelevant by the time they resell the car—potentially costing them thousands. Financial trade-offs The impulsive decision to make a major purchase has financial repercussions. To offset the impact of auto loans on their budget, consumers may cut back on other expenses, as Kulkarni noted. For higher-income individuals, this could mean forgoing vacation plans. For lower-income families, this could involve reducing spending on food or clothing. Consumers might also need to make longer-term compromises. Recent car buyers chose to accept a higher interest rate on a vehicle now instead of waiting for rates to decrease and then refinance those loans, explained Miller. However, interest rates are unlikely to drop. By the time rates are low enough to refinance with more favorable terms, consumers may face larger financial challenges. ‘[The Federal Reserve] would need to have great confidence that either these tariffs are not as inflationary as believed, or until they observe evidence of a significant economic slowdown that requires action,’ Miller said. ‘Unfortunately, at that stage, it often signals an approaching recession.’ Despite these risks, with interest rates expected to remain stable—and the cost of new cars set to increase in the near future—Caldwell suggested that if she were in the shoes of many Americans in need of a new car, she would be among those at dealerships. ‘The reasons for buying a car are distinct from anything else,’ she remarked. ‘When people need a car, they need a car.'”
