How did we get here?
The foundation of today’s crisis was laid five years ago during the pandemic. Supply chain disruptions and factory closures at the time created strange dynamics that pushed car prices higher.
In January 2022, 80% of new car buyers paid more than manufacturer’s suggested retail price, or MSRP, according to Edmunds. Used car prices were rising faster than new car prices at the time, according to Cox Automotive.
In other words, car buyers paid too much for their cars. Now, values have declined while many owners have seen a steady rise in interest rates. This shift has pushed many car owners underwater on their purchase.
In fact, 1 in 5 vehicle trade-ins near the end of last year had negative equity of $10,000 or more, according to Edmunds. The situation is grim and the outlook is just as bleak.
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While the auto market is dealing with rising interest rates and dropping prices, it’s now also facing the additional challenge of President Donald Trump’s trade war.
Roughly 50% of the cars Americans purchased in 2024 were imported from other countries, usually Canada, Mexico, Japan and the EU, according to the Trump administration.
Even domestic car makers rely on auto parts from other countries, which is why the administration recently stepped in to offer some rebates to domestic producers.
Nonetheless, vehicles and auto parts currently face a 25% tariff. As a result, most cars under the price of $40,000 could see a price hike of roughly $6,000, according to Kelley Blue Book.
Since the price hike comes at a time when consumers are already feeling squeezed, it’s unlikely that manufacturers can pass these costs along to them. Instead, many are cutting costs and reducing their workforce.
Hundreds of General Motors and Stellantis autoworkers have been laid off already, while Ford CEO Jim Farley has also warned about potential layoffs ahead.
Potential car buyers and owners need to prepare for this tough market.
Protect yourself
According to Kelley Blue Book, if you’re looking to buy a new car in this market it’s probably better to do so before the tariff impact trickles down to the price tag.
However, given where interest rates and prices currently are, try to stick to a tight budget while shopping.
Buying a relatively cheap used car or leasing one if you can find a good deal is probably a good idea.
If you’re a car owner struggling with auto loan debt, consider trading it in for a cheaper model to reduce the burden. If you own multiple cars, it might also be a good time to sell one to reduce your loan exposure.
It’s also worth considering refinancing or shopping around for a better auto loan interest rate. Locking in a good deal with attractive terms today could shield you from the volatility that potentially lays ahead in the car market.
People who shop around for auto refinance rates can save up to $5,198 on average.
With interest rates coming down, you can save substantially by refinancing your car loan at a lower rate. According to a report published by LendingTree, people who shop around for rates can save up to $5,198 on average. You can compare auto loan refinance rates offered by lenders near you through LendingTree. Click here to compare offers now.
