Car buyers have been spoiled by the current buyer’s market.
Car dealers have relied on incentives to combat the expected loss in demand from the 25% auto tariffs President Donald Trump announced in April.
“People are buying cars because they think tariffs are coming,” one Mazda dealer said.
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Auto sales climbed sharply through the first half of the year as consumers were motivated by the incentives and the need to buy vehicles before any tariff-related price increases.
A recent Bank of America note, however, suggests that the good times are slowing as consumer vehicle loan applications declined from their peak in April, “suggesting that ‘buying ahead’ has largely run its course.”
Bank of America expects lower-income and younger buyers to feel the most pain, as its data shows that median car payments have grown faster than new and used car prices since 2019.
Shockingly, of those households with a monthly car payment, 20% have a payment over $1,000.
New car affordability rebounds modestly in June, despite tariffs
Make no mistake: The auto tariffs are extremely expensive.
But automakers, at the White House’s behest, have chosen to swallow much of the pain for now.
“Tariffs remain a major headwind for vehicle affordability,” said Cox Automotive Chief Economist Jonathan Smoke. “Even with some trade relief, the added cost – up to $5,700 per imported vehicle – hits the most affordable models hardest, limiting options for price-sensitive buyers.“
“We are in the early stages of seeing how manufacturers deal with these added costs, but we do not believe that the American consumer can absorb it all.”
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The estimated average auto loan rate rose by 5 basis points in June to 9.94%, according to Cox Automotive. The current level is still lower by 75 bps year over year, but auto loan rates are the highest they’ve been since December.
The average new-vehicle price rose 0.2%, according to Kelley Blue Book, and the typical payment increased by 0.1% to $757, also the highest it’s been since December.
The average monthly payment peaked in December 2022 at $795 per month.
Americans spend a lot of money on their vehicles
Nearly half of American drivers cite car expenses as the reason they can’t save any money, and the average American spends about 20% of their monthly income on auto loans, fuel, insurance, and maintenance.
Most financial experts cap the monthly income you should spend on a vehicle at 15%.
According to a MarketWatch Guides survey, about 10% of drivers say they spend 30% of their monthly income on driving, while another 12% said they “found themselves living paycheck to paycheck due to the financial strain of their cars.”
In addition to capping your car payments at about 15% of your monthly take-home, financial experts also recommend shoppers aim for a 20% down payment, a 36- to 48-month loan term, and expenses (including insurance) at between 8% and 10% of your gross monthly income.
Experts also recommend that you know your credit score and loan approval amount in advance and that you shop around with different lenders for the best rate.
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