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Auto tariffs could create roadblock for subprime car shoppers

July 27, 2018
If a 25 percent tariff on imported vehicles is imposed by President Donald Trump, cost-sensitive subprime borrowers are the most likely to get squeezed out of the new-car market, spelling trouble for the likes of the Nissan Sentra, Kia Forte and Hyundai Elantra.
Those compact cars, which are imported from Mexico and South Korea, were among the top-sellers among subprime consumers in the year ended June 30, according to Cox Automotive. The researcher estimates retail prices on those models would jump about 10 percent if vehicle tariffs are applied broadly.
Automakers and dealers are furiously trying to dissuade the Trump administration from imposing tariffs. General Motors and others have warned that an import tax would do the most harm to those consumers who have the toughest time affording a new car.
"This impacts lower-income and lower-credit consumers — the consumer who’s already struggling with higher prices, higher gas prices, higher interest rates, you name it," said Jonathan Smoke, chief economist at Cox. "At the percentages being discussed, it would push new vehicles out of consideration."
Bigger-ticket purchases are already challenging for buyers with blemishes on their credit reports. Subprime buyers had to pay about 16 percent interest on average for popular new vehicles, according to Cox.
Auto lenders have been tightening standards for borrowers with credit scores below 620, Cox said. The average interest rate charged to subprime borrowers has increased slightly, but less than bond rates or advertised rates, signaling that automakers are subsidizing the loans to keep payments affordable.
The Commerce Department is investigating whether imported cars are a national security threat, and Trump is said to be considering tariffs of as much as 25 percent. GM, the largest U.S. automaker, submitted comments to the department that cautioned a variety of negative consequences.
"Some of the vehicles that will be hardest hit by tariff-driven price increases — in the thousands of dollars — are often purchased by customers who can least afford to absorb a higher vehicle price point," the Detroit-based company said.