Car buyers struggle with financing as tariffs loom

[WORLD] As car buyers scramble to purchase vehicles before new tariffs take effect, many are facing an unexpected roadblock: securing financing. The push to buy cars before impending price hikes due to tariff increases is colliding with tightening lending standards and higher interest rates, leaving potential buyers in a challenging position. While the desire to beat rising costs is strong, the obstacles in the financing process are creating a perfect storm for car buyers.

For months, experts have warned that the automotive industry was about to face price increases, triggered by the re-imposition of tariffs on imported vehicles and parts. In response, consumers are flocking to dealerships to make purchases before the new taxes hit, fearing that these higher costs will stretch their budgets even further. However, a surprising new trend is emerging: many buyers, eager to finalize their purchases, are struggling to secure the financing needed to make those purchases happen.

With lending institutions tightening their belts and interest rates on the rise, securing an auto loan has become more challenging, particularly for buyers without stellar credit or a significant down payment. Industry analysts and financial experts suggest that this new barrier is pushing some would-be buyers to the sidelines, while others may find themselves stretching their finances to afford their vehicles.

Tariff Anxiety Driving Demand

The looming tariffs have created a sense of urgency among buyers. As the Biden administration reinstates tariffs on certain foreign-made vehicles, consumers are fearing that prices could soar once the tariffs are implemented, which could be as early as the summer of 2025. For many, this has prompted an immediate rush to buy vehicles before the full effects of the tariff policy set in.

According to a recent report from the National Automobile Dealers Association (NADA), car sales have surged by 15% over the last few months in anticipation of price hikes. But while the demand for cars is high, financial institutions are beginning to show caution.

The Financing Dilemma

The key issue buyers are encountering is financing. In response to inflation and economic pressures, the Federal Reserve has increased interest rates over the past year. These higher rates have resulted in higher monthly payments for auto loans, making it more difficult for buyers to afford the vehicles they want, even if they can secure a loan.

“Buyers are getting squeezed from both ends,” said Sarah Simmons, an auto finance expert at J.P. Morgan Chase. “They are already dealing with higher vehicle prices due to the impending tariffs, and now they have to contend with higher interest rates. It’s making it harder for many people to get approved for loans, or they’re being approved for loans with much higher monthly payments than they anticipated.”

Tighter Lending Standards

Banks and credit unions are also being more selective about who they lend to. While a strong job market has kept unemployment levels low, many lenders are still wary of the economic uncertainty that accompanies rising interest rates and the potential effects of higher car prices.

“Lenders are looking at credit scores more closely and are less willing to approve loans for buyers with less-than-perfect credit,” explained Mark Levenson, a senior analyst at Credit Suisse. “The higher interest rates also mean that a larger portion of monthly payments is going toward interest, rather than principal, which can make the loan unaffordable for many consumers.”

Impact on Subprime Buyers

One of the groups most affected by these financing challenges is subprime borrowers — those with credit scores below 600. Historically, subprime buyers have been able to secure auto loans, albeit at higher interest rates. However, with lenders tightening their lending standards, these buyers are finding it even more difficult to obtain financing.

"People with lower credit scores are being shut out of the market altogether," said Michael Davis, a financial counselor in New York. "Many are finding themselves either unable to secure financing or offered loan terms that are so high they can't afford them."

Industry Response

In response to these financial barriers, some dealerships are adjusting their sales strategies. Many are focusing on offering larger down payment options to buyers, in hopes of easing the risk for lenders. Others are exploring partnerships with alternative lending institutions, such as fintech companies, which are sometimes more willing to work with borrowers outside traditional banking systems.

Meanwhile, car manufacturers are also addressing the issue by ramping up incentives and promotional offers to help buyers offset the increased costs. Some manufacturers, particularly in the electric vehicle (EV) sector, are offering favorable financing terms or rebates to help bridge the affordability gap created by tariffs.

The Future of the Market

While the immediate rush to purchase vehicles before the tariffs take effect will likely continue through the summer, experts believe that the broader effects of tightening financing may have longer-term impacts on the car market. As more buyers struggle to secure loans, demand could slow down in the months following the tariff implementation.

“The market is clearly at a crossroads,” said economist Rachel Tanaka. “If financing continues to become more difficult, we may see a cooling off in sales, particularly among middle-income and subprime buyers who are already at a disadvantage. This could have a ripple effect on dealerships and the broader automotive industry.”

For consumers racing to purchase cars before tariffs raise prices, securing financing has become a major hurdle. The dual pressure of rising car costs and higher interest rates is forcing many buyers to rethink their purchasing decisions. As the industry adjusts to these new realities, both car manufacturers and lenders will need to find ways to balance the competing pressures of affordability and profitability. For now, car buyers may find that while the urgency to buy remains high, the road to securing a loan may be much bumpier than anticipated.