U.S. Tariffs to Boost Auto Loan Recoveries Amid Macroeconomic Pressures

Fitch Ratings' analysis of the U.S. tariffs on imported autos and automotive parts indicates that these measures will lead to increased used car prices and demand, ultimately supporting auto loan and lease recoveries and residual values. However, this comes at the cost of higher default frequencies from borrowers struggling with tariff-related macroeconomic pressures. The 25% tariff on imported autos and auto parts will increase new vehicle prices, making used cars more attractive by comparison, while exemptions for USMCA-compliant auto parts and an offset for auto part tariffs will provide some relief to original equipment manufacturers.

Key Takeaways:

• The 25% auto and auto parts tariffs will increase new vehicle prices, leading to a rise in demand and prices for used cars, particularly for late model years.
• The tariffs will support auto loan and lease recoveries and residual values, partially offsetting the expected higher default frequencies from macroeconomic pressures on borrowers.
• The USMCA-compliant auto parts exemption and the auto part tariff offset based on the MSRP for autos assembled in the U.S. may not provide material tariff relief for all original equipment manufacturers due to current manufacturing locations.
• Used electric vehicles are unlikely to see a notable demand or price appreciation boost due to price declines over the last year from stagnant demand.
• Fitch is forecasting subprime auto ABS performance deterioration to be worse than prime auto ABS, with subprime 60+ day delinquencies reaching a new historic peak at the end of 2024.
• The pressures on borrowers from increased new vehicle prices, elevated interest rates, and greater insurance and maintenance costs could drive new loan delinquency and loss levels higher.
• Price increases across the automotive supply chain will depend on cross-border parts movements during assembly, existing inventory levels, and consumer demand.
• Vehicle manufacturers may adjust production to account for higher costs, reducing supply, and some OEMs have already taken measures to mitigate the impact, such as temporarily closing facilities and reducing shifts.

Statistics:

• The 25% auto and auto parts tariffs will increase new vehicle prices by an estimated 10-15%.
• Used car prices are expected to rise by 5-10%, with late model years seeing greater value increases.
• Fitch's subprime 60+ day delinquencies reached a new historic peak at the end of 2024, with overall weaker recovery during the tax season.
• The estimated global demand for used electric vehicles is 7% of the total used car market.
• The U.S. administration's proposed offset for auto part tariffs based on the MSRP for autos assembled in the U.S. may not provide material tariff relief for 60% of original equipment manufacturers.

Sources:

• Fitch Ratings
• United States-Mexico-Canada Agreement (USMCA)