By Ray Birch
CINCINNATI—President Trump’s proposed tariffs on the auto industry, specifically on foreign vehicles and parts, would likely reduce the size of auto lenders’ portfolios if they are passed, analysts told CUToday.info.
The effects from tariffs would not be limited to just new cars, those same analysts said, noting they would certainly impact used car values as well as the leasing market.
Overall, lenders would need to pay closer attention to the auto market and fluctuating pricing.
“Everything is so unsettled right now regarding tariffs,” said Scot Hall, executive vice president of Swapalease.com. “Will cars get more expensive or not? It’s very chaotic. But the possibility exists that some vehicles almost overnight could get more expensive because of these tariffs.”
Eric Budzinski, AVP of marketing at GrooveCar, called the tariffs “speculative,” noting that in the end they may come down to nothing more than political posturing. But if they are put in place?
“Although these proposed tariffs wouldn’t take effect for several months, the entire auto industry, from importing and manufacturing, to retail and lending, could be affected,” said Budzinski, noting that reports indicate the proposed tariffs could increase certain vehicle prices by as much as $7,000.”
The Markets Hit Hardest
The biggest jump in prices, and therefore the biggest hit to consumers’ pocketbooks, would come on foreign luxury vehicles that are affected, said Hall.
“I think we would see markedly higher prices on some of the more popular makes and models, like BMW,” said Hall.
With the record days of new car sales likely in the rear view mirror, higher prices on cars affected by the tariffs would further the trend of declining new car sales, noted Hall.
“I think we would see consumers do two things,” he said. “You would see consumers who are buying cars because they just want to buy a new car—as opposed to needing to replace a car—waiting longer to make that purchase or not buying at all. That would take buyers out of the market.”
But the sticker hikes would also force many consumers to choose a less expensive model to make up for the additional cost, Hall said.
“You might see people switch from the very popular BMW 5 series to a more mid-priced BMW model to keep the monthly payment where they need it,” said Hall.
Other Effects
Hall said that the inevitable impact on lenders’ portfolios is that the overall dollar size of the portfolio would drop from where it would be if the tariffs were not in place.
“The total number of loans lenders make would not drop as much as their dollars,” he said. “Portfolios would get smaller.”
Hall also pointed out that tariffs on the auto industry are not new, and that the European Union now charges a 10% tariff on all U.S. auto imports. In return, the U.S. charges a 2.5% tariff on vehicles from the E.U.
“And in the mid-60s, the U.S. began charging a 25% tariff on all imported pickup trucks, which has given Chevy, Ford and GM a great sandbox to play in,” noted Hall.
Scot Hall
Hall added that over time the U.S. would adjust to the tariffs by bringing back to the U.S. more production from countries such as Canada and China.
Tariffs And Used Cars
Used vehicle values would likely rise, and depreciation would slow, particularly on late-model vehicles coming off lease. Hall pointed out that due to the marked rise in leasing in the last several years, now accounting for more than 30% of all new car sales, a great deal of high-quality used cars are coming back on the market.
Hall told CUToday.info that if those prices rise due to tariffs, that leasing residuals could increase as well, lowering the monthly payment on leasing. Before the talk about tariffs, analysts projected that the flood of high-quality used cars coming back to market would reduce residual values as used prices dropped at a faster pace, raising the price for leasing and turn more consumers back to a traditional loan.
Hall acknowledged that it will be difficult to accurately predict the impact of tariffs on leasing.
“If all sudden late model used vehicles are worth more money since they are much cheaper than the new equivalent, that in turn will raise projected residual values and lower leasing prices on the new vehicles,” said Hall. “Offsetting that to some degree—if the price of a new car jumps so much, which is rising faster, the price of the new car or the residual value. That’s the big question.”
In general, the higher new car prices will naturally push more people to leasing since the monthly payment is lower, Hall said.
“That, naturally, will increase the overall lease penetration in the U.S.,” predicted Hall.
Greg Smith
One CU CEO’s View
Greg Smith, CEO of the $5.3-billion Pennsylvania State Employees CU in Harrisburg, Penn., said that if the tariffs were to be enacted, at least for a short period before the price hikes arrive, new cars sales, and accompanying loans, would increase.
“It might pull business ahead—remember ‘Cash for Clunkers?’ It pulled loan business from the future back so that consumers would get the cash offered,” said Smith.
Budzinski said that the possibility of the tariffs underscores the importance of lenders staying abreast of changing conditions.
“It’s important to remember, these tariffs may be part of the broader political posturing and may not ever affect the consumer,” he said. “I wouldn’t want to see the credit union or dealer get into a situation where they would instill fear into the auto loan lending process. I advise a CU take a wait-and-see attitude towards this.”