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Trump Auto Tariffs Might Make it Harder to Give Subprime Buyers Crappy Car Loans
Trump Auto Tariffs Might Make it Harder to Give Subprime Buyers Crappy Car Loans-October 2024
2024-02-19 EST 22:09:49

It’s well-established that of President Donald Trump’s proposed 25 percent tariff on all imported cars and car parts. But the latest possible outcome of that situation is that tariffs could keep low-income car buyers from obtaining hefty subprime auto loans to purchase new cars, .

Maybe that’s a good thing? As we’ve covered here , the subprime auto loan market is largely out of control, in similar ways to the housing market before it exploded a decade ago, just on a smaller scale.

Here’s the opener from Bloomberg’s story:

If President Donald Trump decides to impose a 25 percent tariff on imported vehicles, cost-sensitive subprime borrowers are the most likely to get squeezed out of the new-car market, spelling trouble for the likes of the Nissan Sentra, Kia Forte and Hyundai Elantra.

What kind of trouble? (Emphasis mine):

“This impacts lower-income and lower-credit consumers — the consumer that’s ,” said Jonathan Smoke, chief economist at Cox. “At the percentages being discussed, it would push new vehicles out of consideration.”

Uh.

Bigger-ticket purchases are . Subprime buyers had to pay , according to Cox.

Sixteen percent loans! Good lord.

Anyway, the premise of this report is that, were Trump’s auto tariff to pass, subprime car buyers run the risk of being unable to obtain a loan with a excessive high interest rate for a vehicle that—in the words of Cox Automotive’s chief economist—leaves them “struggling with higher prices, higher gas prices, higher interest rates, you name it.”

The presupposition here is that subprime car buyers need to buy a new vehicle right now, at a time when vehicles are , with Americans , as car loan terms are being , putting said consumers at risk of default.

I don’t think anyone should have to take on the sometimes exceedingly high upkeep costs of a used car, but perhaps banks and dealers should avoid trying to entice subprime buyers to stretch themselves thin with a new car loan. Perhaps these buyers should consider a good, reliable, cheaper used car.

My esteemed colleague Tom McParland :

Right now, a record number of buyers are underwater on their current car—but that’s not the only problem. A combination of factors could be creating a perfect storm of long-term loans, low equity, and persistent debt.

This situation is partially a result of falling used car values. When new car prices drop, used car prices take a dive to stay competitive. This leads to a buyer’s market for pre-owned models. This also means your used trade-in will be worth less. Lower trade values can often offset some of the additional savings that are being offered on new models. So the net cost to the buyer is no better than buying a car when the industry is not desperate to move units.

There are lenders out there that literally operate on the expectation they’ll repossess as many as . And while too many are loathe to consider the fate of the unfortunate car buyer who winds up with a burdensome car loan, thinking they deserve the most to blame for signing on the dotted line, up their sleeves—i—to get car buyers to unwittingly take on usurious auto loans.

The one potential, obvious concern is that, instead of being burdened by a shitty subprime loan with a high APR, they’ll be taking on a subprime loan for a used car, which sure. That’s why it can’t be underscored enough that the best thing buyers can do is to obtain a loan ahead of time from a credit union or their bank, shop around for the best deal, and also to just take on less car.

Even better, I’d love to see someone create an easily accessible micro-lending platform for used cars that doesn’t burden subprime buyers with high interest rates. Sure, you have to assume some risk, but you also don’t need to saddle someone with insurmountable debt—which is inevitably the case when it comes to some instances of subprime auto lending.

But framing this as a potentially bad thing for auto companies or lenders is just strange. And so I think it’s reasonable to say that, despite the obvious problems the 25 percent auto tariff could have, hurting the subprime buyer’s ability to take on a new car loan doesn’t bolster any sort of argument against Trump’s proposal. If that’s a serious consideration on the table, I’d say it’s actually one argument in favor of the tariffs.

There’s reasonably priced used cars that can be reliable with some basic upkeep. More subprime buyers should go that route. What shouldn’t happen—though I’ll assume it’s inevitable if the tariff goes into effect—is that dealers and auto companies will find ways to convince them to take on even more than they already can.

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