President Donald Trump continues to mull over the idea of a border tax — which if passed would place a new tax on nearly all imported goods, including cars — and the resulting vehicle price increases could push financing options to their limit, said Alan Baum, founder of West Bloomfield, Michigan-based Baum & Associates.
The firm drilled into this hypothetical border tax and found that car makers, such as Jaguar and Land Rover — which manufacture cars entirely overseas — could see as much as a $17,000 per car increase in cost, the report details. Ford and General Motors would field a much smaller price hike at $282 and $995 per vehicle, respectively, due to both companies significant U.S. manufacturing presence. Tesla, however, might not see an increase at all, because almost all manufacturing for its model S sedan is done in the U.S.
However, those cost increases don’t necessarily mean they’ll get passed onto consumers. The change could wind up evening out because a border tax is expected to be paired with lower corporate tax rates, Baum told Auto Finance News.
Still, to the extent that prices do increase for certain manufacturers, they may come at a bad time for auto finance given how stretched loan terms, lease volumes, and incentives have become in recent years, he added.
“It’s not like we can say ‘ok, if the price goes up we’ll just make it a 9 [year loan term],’ there are limits there,” Baum said. “Leasing is at 30%, which is as high as it’s ever been, it’s always been higher for luxury cars than it is for mainstream cars. Is there a limit for that? Yes there is.”
Many believe 2016 was the peak of the auto cycle, and how manufacturers implement incentives this year will have a great effect on off-lease volume, and thus used car values. Increased prices through a border tax complicates all those factor further, he said.
“If the cycle peaked last year, as we think it has, and overall sales are coming down, you would need to — if you wanted to keep sales up — increase incentives regardless of pricing,” Baum said. “Pricing just throws another wrench into that.”
The auto finance industry may be bound for tightening on its loan policies anyway, but increased prices “might force the industry to be a little more careful on its loan policy,” to correct for increasing delinquencies, Baum said.Like This Post